“Many things difficult in design prove easy in performance.”

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DIRECT LABOR VARIANCE

Direct Labor Variance Example

The direct labor variance analysis focuses on the difference between actual and budgeted direct labor expenses.  Fundamentally, direct labor variances are due to unplanned differences in rate and efficiency.  Beyond this, the efficiency variance can be broken down further to determine the impact of changes in mix and yield.


BENEFITS OF A DIRECT LABOR VARIANCE ANALYSIS

A direct labor variance analysis provides valuable insight as to why your company fell short of or exceeded direct labor cost expectations.  This insight allows your organization to make timely adjustments in light of changing circumstances and facilitates more accurate future planning.


THE DIRECT LABOR VARIANCE ANALYSIS PROCESS

  • Compile budgeted and actual rate and hourly information
  • Calculate the direct labor rate and efficiency variances
  • Break the direct labor rate variance down into its mix and yield components
  • Review the results for abnormalities
  • Investigate the abnormalities, if they exist


FURTHER READING

These links elaborate on the topic at hand.  They serve as a good starting point for those companies that would like to learn more or would like to address these topics “in house.”  For those firms that prefer to continue to focus on their current responsibilities and would value the objective viewpoint of a professional from outside of the organization, click here. 

Direct Labor – Standard Cost and Variances | AccountingCoach.com
Excerpt:  “Unlike direct materials (which are obtained prior to being used) direct labor is obtained and used at the same time. This means that for any given good output, we can compute the direct labor rate variance, the direct labor efficiency variance…”

Chapter 44 Direct Labor Variances
Excerpt:  “The descriptions below tell you what information is provided by the amounts calculated. In each comparison, if the left total exceeds the right total, the variance will be unfavorable. If the left total is less than the right total, the variance will be favorable.”


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