Direct labor rate and quantity standards

By: Rashid Javed | Updated on: October 24th, 2021

How do companies set rate and time standards for labor costs? Why are theses standards established?

Direct labor standards are established to control labor costs. Two commonly used direct labor standards are direct labor rate standard and direct labor time standards. The direct labor rate standard is also known as direct labor price standard. These two standards are briefly discussed below:

Direct labor rate standard:

Setting direct labor rate standard means calculating an expected hourly rate for labor costs. It includes not only wages per hour but also other costs associated with labor such as fringe benefits, employment taxes etc. The necessary information to calculate standard labor rate per hour is taken from the  production department and previous years data.

Example

Modex company’s basic wage rate is $15. Other costs associated with labor are employment taxes (5% of basic wage rate) and fringe benefits (15% of basic wage rate).

Its standard labor rate per hour is calculated as follows:

direct-labor-standards-img1

In above example, the standard labor rate is $18.00 per hour. In a highly labor intensive industry, all workers cannot be paid equally. Some workers may be more senior and therefore more experienced than others. The workers with high efficiency are usually paid more remunerations than the workers that are not so efficient. This situation creates a problem in setting  labor rate standards. In order to avoid the complications, many companies set an average rate for the department as a whole (as in our example). It makes the implementation of standard costing simple.

Direct labor time standard:

Direct labor time standard is the standard time required to manufacture a unit of product under normal working conditions. This time is normally expressed in hours.

In above example, suppose the Modex company calculates standard hours to manufacture a unit of product as follows:

direct-labor-standards-img2

Notice that the standard time required to manufacture one unit of the Modex company is 3.25 hours. It consists of basic time plus allowance for breaks, downtime and rejections.

In our example, the standard time to complete one unit is 3.25 hours and the standard labor cost per hour is $18. The standard labor cost per unit of Modex company is therefore $58.5 as computed below:

= $18 × 3.25hours
= $58.5

 Like other cost elements (direct materials and manufacturing overhead), the standard labor cost per unit is written on the standard cost card of the product.

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One Comment on Direct labor rate and quantity standards
  1. J

    You just saved my life! Couldn’t figure out an assignment for the longest time and was extremely frustrated until reading this….thank you!

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