# How to Figure Out Direct Labor Cost Per Unit

Direct labor costs depend on how quickly and efficiently your employees produce completed items. Although direct labor costs can and do vary with each production run, your direct labor costs should remain in the same variance range.

Calculating a standard direct labor cost per unit rate lets you set a tolerance range of direct labor variance costs. You can use this information to identity and investigate why your actual costs are higher or lower than your standard direct labor per unit costs. Knowing the direct labor cost per unit makes pricing and margin management much easier.

## Calculate the Hourly Rate

The direct labor hourly rate, also known as the labor rate standard, includes the hourly pay rate, fringe benefits costs and your portion of employee payroll taxes. Calculate the hourly value of fringe benefits and employee taxes by dividing that amount by the number of hours worked in the pay period.

For example, your employee earns **$10** an hour, works a 40-hour week and has payroll taxes of **$60**. Divide **$60** by 40 to get the hourly rate of **$1.50**. Add the **$1.50** in employee payroll tax to the **$10** hourly rate to get the total direct labor hourly rate of **$11.50**.

## Calculate Labor Hours

Direct labor hours, also known as the direct labor efficiency standard, is the number of direct labor hours it takes to produce one finished item, according to Accounting Coach. If you produce goods in batches, you must calculate per unit direct labor hours. To find this number, divide the number of items produced by the number of hours it takes to produce it. For example, if it takes 10 hours to produce 10 items, it takes one direct labor hour to produce one finished product.

## Calculate Per Unit Cost

The direct standard labor rate is your direct labor cost per unit. To calculate the number, multiply the direct labor hourly rate by the number of direct labor hours required to complete one unit. As a labor cost example, if the direct labor hourly rate is **$10** and it takes five hours to complete one unit, the direct labor cost per unit is **$10** multiplied by five hours, or **$50**. It may be best to set up a labor cost calculator in excel to keep track of these figures over time.

## Direct Labor Cost Variance

The direct labor cost variance lets you identify when costs exceed the tolerance range, according to Simple Studies. Calculate the actual direct labor cost per unit and compare it with the direct labor standard rate. The difference is your direct labor cost variance.

If the actual direct labor cost per unit is less than the direct labor standard rate, you have a favorable variance; it costs you less to produce the items than expected. If the actual direct labor cost per unit is more than the direct labor standard rate, you have an unfavorable variance; it costs you more to produce the items than expected.

Controlling direct labor costs is an important part of making sure that your business maintains its profitability.