How to Calculate Direct Labor Standard Price

Direct labor standard price lets you estimate your direct labor costs for production or services according to the Corporate Finance Institute. This lets you know how many employees you need to complete a project or production run. For example, it is useful for scheduling on the manufacturing line to complete a job on time. You can use the same direct labor standard price as long as your direct labor employee wages and benefits do not dramatically increase or decrease. Otherwise, you want to recalculate your direct labor standard price so that it continues to reflect your actual direct labor costs.

What is Direct Labor Hourly Price?

Your direct labor standard price includes the basic hourly wage and the business portion of the Medicare and Social Security taxes you pay for each employee. The cost of employee fringe benefits such as vacation pay, holiday pay and medical leave are part of the direct labor standard price. If you pay for all or part of your employees’ health insurance, accident insurance or life insurance, you include those amounts in with the direct labor standard price. You can include the full amount or use a percentage of the fringe benefits costs.

How to Calculate Direct Labor Standard Price?

The direct labor standard time is based on the actual amount of time it takes for one employee to complete one job. You track the actual time by having your employees keep a log of when they start and stop their job activities. The time spent on breaks, lunch or personal time is deducted from the work day. For example, one employee completes one job during an eight-hour shift. Each employee gets 30 minutes of break time and 30 minutes for lunch, or one hour total. The standard direct labor time to complete one job is eight hours minus one hour, or seven hours.

The direct labor standard price acts as a benchmark for your direct labor costs. You calculate the standard price by multiplying the direct labor hourly price by the standard job completion time. For example, one employee can produce 10 completed units in two hours. The direct labor hourly cost is $9 per hour and the standard direct labor time is two hours. The total direct labor hourly cost is two hours multiplied by $9 per hour, or $18, to produce one unit. The direct labor standard rate to produce 30 units costing $18 each is $540. Keep in mind that the direct labor standard price includes employment taxes, fringe benefits and any other associated costs per Accounting for Management.

What is Standard Price Variance?

The direct labor price variance is the difference between the actual direct labor price and the direct labor standard price. You have a favorable price variance when your actual direct labor price is less than the standard price, meaning it cost you less to produce the units than you expected. An unfavorable standard rate variance is when the actual direct labor price is more than the standard price. This means that your direct labor costs were higher than the standard price. Whether the variance is favorable or unfavorable, you want to investigate the reasons behind an unusually large price variance.