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Direct Labor Rate Standard:

The standard rate per hour for direct labor includes not only wages earned but also fringe benefits and other labor costs.

In many plants, the standard is based on rates established in collective bargaining agreements that define hourly wages, piece rates and bonus differentials. Without a union contract, rates are based on the earnings rate as determined by agreement between the employ and the personnel department at the time of hiring. Since rates are generally based on definite agreements, labor rate variances are not too frequent. If they occur, they are generally due to unusual short-term conditions existing in the factory.

To assure fairness in rates paid for each operation performed, job rating has become a recognized procedure in industry. When a rate is revised or a change is authorized temporarily, it must be reported promptly to the payroll department to avoid delays, incorrect pay, and faulty reporting. Any difference between the standard and actual rates results in a labor rate (wage or cost) variance.


Following is an example of the calculation of standard labor rate per hour:

Basic wage rate per hour $10
Employment taxes at 10% of the basic rate 1
Fringe benefits at 30% of the basic rate 3
Standard rate per direct labor hour 14

Many companies prepare a single standard rate for all employees in a department. This standard rate reflect the expected "mix" of workers, even though the actual wage rates may very somewhat from individual to individual due to differing skills or seniority. A single standard rate simplifies the use of standard costs and also permits the manager to monitor the use of employees within department. according to standard computed in above example, the direct labor rate is $14 per hour.

Relevant Articles:

Definition and Explanation of Standard Cost
Purposes and Advantages of Standard Costing System
Setting Standards
Materials Price Standard
Materials Price Variance
Materials Quantity Standard
Materials Quantity Variance
Direct Labor Rate Standard
Direct Labor Rate Variance
Direct Labor Efficiency Standard
Direct Labor Efficiency Variance
Factory Overhead Cost Standards
Overall or Net Factory Overhead Variance
Overhead Controllable Variance
Overhead Volume Variance
Overhead Spending Variance
Overhead Idle Capacity Variance
Overhead Efficiency Variance
Variable Overhead Efficiency Variance

Fixed Overhead Efficiency Variance

Mix and Yield Variance
Variance Analysis Example
Standard Costing and Variance Analysis Formulas
Management by Exception and Variance Analysis
International Uses of Standard Costing System
Advantages, Disadvantages, and Limitations of Standard Costing




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