Much like the direct materials variance, the direct labor variance is calculated from actual and standard amounts that give the rate variance and the quantity variance. One significant difference is that the accountant or manager calculates the direct labor variance from the hours needed times the rate per hour. This is determined by creating three labor categories: actual at actual, actual at standard, and standard at standard. Standard hours per unit is amount of labor time that should be required to complete a single unit of output.
Assume that a furniture manufacturer has the following labor data to make 15,000 units of furniture:
Direct Labor Hours and Rates
|Standard Hours per Unit||Actual Hours per Unit||Standard Rate per Hour||Actual Rate per Hour|
Direct Labor Variance Calculations
|Actual at Actual||Actual at Standard||Standard at Standard|
|Units||Actual Hours per Unit||Actual Rate||Total||Units||Actual Hours per Unit||Standard Rate||Total||Units||Standard Hours per Unit||Standard Rate||Total|
Though the calculations are similar to the direct material variance, the direct labor variance analysis is more profound. In this example, the total variance is unfavorable. This is due to the larger unfavorable direct labor efficiency variance.
The direct labor variance helps managers understand the efficiency of the workers within the manufacturing process. It can be used as a performance measure. In this case, the loss in efficiency or performance may be because Mary's Manufacturing is paying its workers less than standard scale. Based on these calculations, managers will review hiring practices and try to figure out a solution to the unfavorable variance. There is the possibility that the lower pay is attracting less-qualified employees, which is negatively affecting the quality of work. If so, training programs may lessen or remove the variance.
It would also make sense to compare the labor efficiency to the direct materials quantity variance, which is also an efficiency indicator. If the quantity has not declined but the labor efficiency has, then the issue is most likely with the workers. If the quantity also declined, then it may be a problem with materials or with the manufacturing process.