Direct labor variance

Definition

Direct labor variance measures the difference between the actual direct labor costs incurred and the standard costs that were expected. It helps managers understand if labor costs are being managed efficiently or if adjustments are necessary.

5 Must Know Facts For Your Next Test

1. Direct labor variance is divided into two components: direct labor rate variance and direct labor efficiency variance.
2. A favorable direct labor variance indicates that actual labor costs were lower than expected, while an unfavorable variance indicates higher costs.
3. Direct labor rate variance focuses on the difference in wage rates paid versus standard wage rates.
4. Direct labor efficiency variance looks at the difference in actual hours worked versus standard hours allowed for the production achieved.
5. Managers use direct labor variances to identify potential issues in workforce management, training, or scheduling.

Review Questions

• What are the two components of direct labor variance?
• How is a favorable direct labor variance interpreted by managers?
• What does direct labor efficiency variance measure?

Related terms

Standard Costs: Predetermined costs based on efficient operations and used as benchmarks for measuring performance.

Direct Labor Rate Variance: The difference between the actual hourly wage paid to workers and the standard hourly wage, multiplied by the actual hours worked.

Direct Labor Efficiency Variance: The difference between the actual hours worked and the standard hours allowed, multiplied by the standard hourly wage rate.