# Direct Labor Variance Journal

In a standard costing accounting system, direct labor has two main variances price and efficiency. Details of the calculation of each of these variances can be found in our tutorials on the direct labor price variance and the direct labor efficiency variance.

Unlike direct materials, direct labor is used at the same time as it is purchased, and therefore the price and efficiency variances occur at the same time, on the same production run, and a single journal is needed post the variances together with the standard and actual cost to the accounting system.

## Example of Direct Labor Variance

This example will use the same information used in the direct labor price variance tutorial and the direct labor efficiency variance tutorial.

In this example, the manufacturer has set the standard labor rate at 15.00 per hour, and the standard quantity of labor needed per item manufactured at 0.50 hours. On a production run of 500 items they find they have used 230 hours of labor at an actual labor rate of 18.00 per hour.

The two variances are calculated as follows:

### Direct Labor Price Variance

```Direct labor price variance = (Standard rate - Actual rate) x Actual quantity
Direct labor price variance = (15.00 - 18.00) x 230
Direct labor price variance = -690
```

and

### Direct Labor Efficiency Variance

```Direct labor efficiency variance = (Standard quantity - Actual quantity) x Standard rate.
Direct labor efficiency variance = (500 x 0.50 - 230) x 15.00
Direct labor efficiency variance = 300
```

This is summarized in the table below:

Direct labor variance summary
Items Labor/Item Quantity Rate Cost
Standard 500 0.50 250 15.00 3,750
Actual 500 230 18.00 4,140
Direct labor variance -390

The direct labor variance can be analyzed as follows:

Direct labor variance analysis
Quantity Rate Cost
Direct labor price variance 230 -3.00 -690
Direct labor efficiency variance 20 15.00 300
Direct labor variance -390

In this example, the direct labor price variance is negative (-690 unfavorable), and the direct labor efficiency variance is positive (300 favorable), resulting in an overall negative direct labor variance (-390 unfavorable).

## Direct Labor Variance Journal Entry

The standard costing journal entry to record the direct labor variances and to post the standard and actual labor cost is as follows:

Direct labor variance journal
Account Debit Credit
Work in process inventory 3,750
Direct labor price variance account 690
Direct labor efficiency variance account 300
Wages payable 4,140
Total 4,440 4,440

The posting to wages payable reflects the actual amount (4,140) due to the employees for wages. In the standard costing system, the labor costs are posted at the standard cost of 3,750 represented by the debit to the work in process inventory account.

The difference between the two postings is the direct labor variance of 390, which is split, and posted to the direct labor price variance account as a debit of 690, representing the unfavorable variance, and to the direct labor efficiency variance account as a credit of 300, representing the favorable variance.

## Clearing the Direct Labor Variance Accounts

The financial statements of the business must ultimately show the actual costs incurred by the business, and at the end of an accounting period, having investigated the direct labor variances using the variance report, the balance on the variance accounts need to be cleared using the rules discussed in our standard costing and variance analysis tutorial and are available for download in PDF format here. These rules can be summarized as follows:

1. For small, insignificant direct labor variances it is not worth the time and effort apportioning the balance, so it is simply transferred to the cost of goods sold account.
2. Larger unfavorable variances (debit balances) which have resulted from errors and inefficiencies in the business, are also transferred to the cost of goods sold account, as apportioning them to an inventory account would incorrectly increase the value of the inventory.
3. All other significant direct labor variances (debit or credit balances) are split between inventory accounts and the cost of goods sold account in proportion to the amount of the standard labor cost remaining on that account.

## Variance Apportionment Example

In the example used above the direct labor price variance was unfavorable leaving a debit balance of 690 on the variance account, and the direct labor efficiency variance was favorable leaving a credit balance of 300 on the variance account. Assume for simplicity that these were the only direct labor variances for the year.

If the balances are considered insignificant in relation to the size of the business, then they can simply be transferred to the cost of goods sold account.

Insignificant balances on direct labor variance accounts journal
Account Debit Credit
Direct labor price variance 690
Direct labor efficiency variance 300
Cost of goods sold 390
Total 390 390

If however, the balances are considered to be significant in relation to the size of the business, then the direct labor variances need to be analyzed between the inventory accounts (work in process, and finished goods) and the cost of goods sold account.

Suppose for example, 40% of the standard labor cost remained in the work in process inventory, and 60% had been used in production and the items sold, then the direct labor variance account balances need to be split as follows:

Apportioning the direct labor variance account balance
Account Percentage Amount
Work in process inventory 40% 156
Cost of goods sold 60% 234
Total 100% 390

And the bookkeeping journal to post the transaction to clear the direct labor variance accounts would be as follows:

Significant balances on direct labor variance accounts journal
Account Debit Credit
Direct labor price variance 690
Direct labor efficiency variance 300
Work in process inventory 156
Cost of goods sold account 234
Total 690 690

The debit balance on the direct labor price variance account (690), and the credit balance on the direct labor efficiency variance account (300) have now been split between the work in process inventory account (156) and the cost of goods sold account (234) increasing both accounts by the appropriate amount, and clearing the variance account balances.