Budgeting Basics and Beyond

8.7. Labor Variances

Standard labor rates may be computed, based on the current rates adjusted for future changes in such variables as:

• Union contracts

• Changes in operating conditions

• Changes in the mix of skilled versus unskilled labor

• The average experience of workers

The wage system affects the standard cost rates. The basic rates are (1) day or hourly, (2) straight piece rate, and (3) multiple piece rates or bonus systems. Wage incentive systems can be tied to a standard cost system once standards have been formulated.

Direct labor quantities may be obtained from engineering estimates. Line supervisors can corroborate the estimates by observing and timing employees.

When salary rates are set by union contract, the labor rate variance usually will be minimal. For planning purposes, the rate standard should be the average rate expected to prevail during the planning period. Note: Labor rates for the same operation may vary due to seniority or union agreement.

Labor time standards should include only the elements controllable by the worker or work center. If the major purpose of a cost system is control, there should be a tight labor time standard. If costing or pricing is the major purpose of the cost system, looser labor standards are needed. Labor efficiency standards typically are estimated by engineers on the basis of an analysis of the production operation. The standard time may include allowances for normal breaks, personal needs, and machine downtime.

Labor variances are ...