How to Compute the Direct Labor Price Variance

Businesses evaluate their product costs on a regular basis. Understanding these costs helps the company to make pricing decisions and estimate its potential profits. Each year the company creates a budget, which helps the company develop a standard cost for the direct labor needed to manufacture its products. Each month the company calculates its actual direct labor cost. The difference between the actual and standard cost represents a variance. One component of the direct labor variance consists of the direct labor price variance. The direct labor price variance calculates the impact of a change in the labor rate compared to the standard labor rate.

  1. 1.

    Retrieve the total hours worked from the payroll department. Retrieve the actual labor rate from the human resources department.

  2. 2.

    Multiply the total hours by the actual hours for each employee. Add these totals together to determine the total actual direct labor dollars.

  3. 3.

    Retrieve the standard labor rate from the direct labor budget. Multiply the actual labor hours worked by the standard labor rate. This equals the standard labor cost.

  4. 4.

    Subtract the standard labor cost from the actual direct labor dollars. This equals the direct labor price variance.