What is direct labor variance?

Direct labor variance is the difference between the actual cost of direct labor used in a production process and the standard cost that was budgeted for that same amount of direct labor. Direct labor variance can be favorable (when the actual cost is less than the standard cost) or unfavorable (when the actual cost is more than the standard cost).

Calculating the direct labor variance involves three main steps:

1. Determine the standard direct labor cost: The standard direct labor cost is the predetermined amount that should have been incurred for the actual quantity of direct labor used. This is calculated by multiplying the standard direct labor rate by the actual direct labor hours worked.

2. Determine the actual direct labor cost: The actual direct labor cost is the actual amount paid to direct laborers for the work performed. This includes wages, overtime pay, bonuses, and any other compensation paid to direct laborers.

3. Calculate the direct labor variance: The direct labor variance is calculated by subtracting the standard direct labor cost from the actual direct labor cost.

A favorable direct labor variance indicates that the actual cost of direct labor was less than the budgeted amount, while an unfavorable direct labor variance indicates that the actual cost exceeded the budgeted amount.

Direct labor variance is an important metric used by businesses to monitor and control their labor costs. It helps identify inefficiencies in the production process, such as excessive overtime or low productivity, and allows businesses to take corrective actions to minimize these variances and improve their overall profitability.