The total direct labor cost variance is the difference between the actual labor cost in producing units in the period and the standard labor cost of producing those units.
The variance is adverse (A) if actual cost is higher than the standard cost, and favorable (F) if the actual cost is less than standard cost. The direct labor total variance can be analyzed into rate variance and efficiency variances.
The causes of direct labor total variance can either be caused by labor rate variance or labor efficiency variance. Therefore the labor variance can be caused by factors which either cause labor rate to be favorable or unfavorable or factors which cause the labor efficiency to be favorable or unfavorable.
Possible causes of favorable labor rate variances:
- actual pay increase turning out to be less than expected;
- using direct labor employee who are relatively inexperienced and new than normal hence paying them less than standard.
Possible causes of adverse labor rate variances:
- an increase in pay for employees;
- working overtime hours paid at premium above the basic rate;
- using the direct labor employees who were more skilled and experienced than the normal and who are paid more than standard rate per hour.
Possible causes of favorable labor efficiency variance:
- more efficient methods of working;
- using employees who are more experienced than standard resulting in favorable efficiency variances as they are able to complete their work more quickly than less experienced colleagues.
Possible causes of adverse labor efficiency variance:
- an event causing poor morale;
- using employees who are less experienced than standard resulting in adverse efficiency variance.
When the labor variance appear significant, management should investigate the reason why they have occurred and take control measures where appropriate, to improve the situation in the future.