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

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.
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.
Subtract the standard labor cost from the actual direct labor dollars. This equals the direct labor price variance.
References
Tips
 The direct labor variance represents only one part of the total product cost variance. Direct material variances and manufacturing overhead variances also impact the product cost variance. The actual cost will always vary from the standard cost. Decide what level of variance requires further analysis.
 Direct labor price variances point out areas where the company experienced a higher or lower expense than it expected. Investigate the reason for the variance by reviewing payroll records, by reviewing the standard labor rate calculation and by confirming the direct labor rates.
 When a company awards annual wage increases in the middle of the year, it can expect a direct labor price variance throughout the year. The actual labor paid prior to the increase equals less than the standard rate. The actual labor paid after the increase equals more than the standard rate.
Warnings
 Don’t waste time chasing small variances. Focus your energy on investigating the causes of large variances. Expect small variances to occur.