The standard rate per hour for direct labor should include all the costs of direct labor workers, including:
Hourly wage rates.
Many companies prepare a single standard rate for all employees in a department, based on the expected mix of high and low wage rate employees. This procedure:
Simplifies the use of standard costs
Allows monitoring the actual mix of employees in the department
The standard rate per hour for the expected labor mix is determined by using average wage rates, fringe benefits, and employment taxes as follows:
Average wage rate per hour $13
Average fringe benefits 4
Average employment taxes 1
Standard rate per direct labor hour $18
The standard hours per unit for direct labor specify the amount of direct labor time required to complete one unit of product. This standard time should include:
Engineered labor time per unit.
Allowance for breaks, personal needs, and cleanup.
Allowance for setup and other machine downtime.
Allowance for rejects.
The standard hours required to produce a jogging suit are determined as follows:
Basic labor time per unit 1.4 hrs
Allowance for breaks and cleanup 0.1 hrs
Allowance for setup and downtime 0.3 hrs
Allowance for rejects 0.2 hrs
Standard hours per jogging suit 2.0 hrs
Once the time and rate standards have been set, the standard cost of labor for one unit of product can be computed:
2.0 hrs. per jogging suit ´ $18 per hr. = $36 per jogging suit.
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