How to Determine Direct Labor Standards
Direct labor is the cost of paying your employees to make products. Proper planning requires setting standards with respect to two factors: the direct labor standard rate and the direct labor standard hours per unit.
To compute the direct labor standard rate or SR (the cost of direct labor), consider all the costs required for a single hour of direct labor. For example, suppose Band Book usually pays employees $9 per hour. Furthermore, it pays an additional $1 per hour for payroll taxes and, on average, $2 per hour for fringe benefits. As shown, the direct labor standard rate equals $12 per hour.
You also need to estimate the amount of direct labor time needed to make a single unit, the direct labor standard hours (SH) per unit. This measurement estimates how long employees take, on average, to produce a single unit. Include in this rate the time needed for employee breaks, cleanups, and setups.
For example, employees at Band Book Company need three hours to produce a single case of books, plus an average of 30 minutes of setup time and 30 minutes of break time. Therefore, the direct materials standard quantity equals four hours.