Cost Variance Analysis Paper

TOTAL DIRECT LABOR COST VARIANCE CAN BE SPLIT INTO
• Direct labor rate variance (P)
Calculation: actual total labor costs - (total actual labor hours worked x budgeted labor hour rate)
Interpretation: calculates the portion of labor costs variance driven by the changed labor rate per hour
Possible reasons for variances: changes in staff qualification and skills, general increase of wages in economy, premiums paid to finish a job quickly, poor budgeting

• Direct labor quantity (efficiency) variance (P)
Calculation: (total actual hours worked – total budgeted hours worked) x budgeted labor hour rate
Interpretation: calculates the portion of labor costs change driven by the changed number of labor hours worked
Possible reasons for variances: