Introduction to Labor Variances

What you’ll learn to do: Discuss different types of labor variances

Variances in labor, like variances in materials are multifaceted. We might have the same number of hours at a different hourly rate, or more hours at the same rate, or some combination of these factors. Why would the hourly rate vary from budget? Why might the hours change? Let’s first look at the standard cost variance analysis chart for labor variances.

Spending Variance flows into Labor Rate Variance, Actual Hours of Input at Standard Rate, and Labor Efficiency Variance. Labor Rate Variance flows into Actual Hours of Input at Actual Rate. Labor Efficiency Variance flows into Standard Hours Allowed for Actual Output, at Standard Rate.

At Hupana Running Company, our budget allows for .5 hours of direct labor per pair of shoes produced. The cost of each hour is budgeted at $20 per hour.

If we use more hours at the same rate of pay, it would be called a labor efficiency variance.

If we used the same hours at a higher rate of pay it is called a labor rate variance.

A combination of these may happen as well! We could have fewer hours, but a higher rate of pay. Let’s see what difference these variances make in our direct labor budget!

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