Standard Labor Hours
Standard Labor Hours is the number of labor hours spent to produce one unit of finished goods. The standard cost is the variable cost which includes direct labor, direct material, and variable overhead.
During the budget preparation, the company calculates the standard cost of one unit product. They will be able to set the selling price and gross profit. And by deducting the fixed cost, they will be able to get the budgeted net income.
Standard Labor hours usually calculate at the beginning of the year when accountant compile all the information from the prior year. We have to compare last year’s standard labor hours with the actual hours if there are any adjustments required. The standard labor hour should not much different from the actual hour. If the variance is huge, we have to investigate to confirm whether the calculation is wrong or the actual work is not effective and efficient.
Example of Standard Labor Hours
Company produces product A, B and C. The time spends on manufacturing each product is 2 hours, 2.5 hours, and 3 hours respectively. During the month, the company plans to produce the following units:
The total budget hours (standard hours allowed) should be the following:
- A: 2,000 hours
- B: 5,000 hours
- C: 4,500 hours
The total hours for all three products: 11,500 hours
Standard Hours Allowed
Standard Hours Allowed is the amount of time we expect to spend to produce actual products. It is the multiply of actual units with the standard labor hours per unit. For example, the standard labor hour of the company is 5 hours per unit. During the first quarter, they receive orders of 5,000 units. So the standard hour allowed is equal to 25,000 hours (5,000 units x 5 hours). If they spend more than that it means they are over spend.