Direct Labor Mix Variance Definition
Direct Labor Mix Variance is defined as the difference between the exact amount of labor needed to manufacture a product and the actual amount of labor used for that product. Direct Labor Mix Variance can be used to make a product more cost-efficient, less wasteful of resources, and save time during production. It is used to increase the profits of the company by saving money on labor costs.
How to Calculate Direct Labor Mix Variance
To calculate Direct Labor Mix Variance you must first identify the exact amount of labor it requires to produce a product. Then, for that same product, find the actual cost of the labor used. Direct Labor Mix Variance is found by subtracting the actual from the exact and multiplying by 100 to get %.
The Formula for Direct Labor Mix Variance
Why Is There a Direct Labor Mix Variance?
Many factors can contribute to Direct Labor Mix Variance and can cause a Direct Labor Mix Variance problem.
- Different labor rates for different products or different labor rates for the same product in different areas of the company.
- Increased production expectations than what was initially determined during cost planning or lack of planning for resources that are needed.
- Not having enough resources to achieve the optimal product mix or a change in the desired amount of products that need to be produced.
Advantages and Disadvantages of Direct Labor Mix Variance
There are several advantages and disadvantages that one must take into consideration with Direct Labor Mix Variance.
The Advantages of Direct Labor Mix Variance Are the Following:
- Direct Labor Mix Variance can be used to show the number of resources being wasted on producing a product.
- Direct Labor Mix Variance can be used to show the cost of resources being put into production, which means it shows how much money is being lost on wasted production.
The Disadvantages of Direct Labor Mix Variance Are:
- Direct Labor Mix Variance does not include overhead costs or product mix changes that would need to be taken into account.
- Direct Labor Mix Variance showing the cost of wasted resources is not a true reflection of how much money is being lost by the company.
How Do Companies Decrease Direct Labor Mix Variance?
There are many ways to decrease Direct Labor Mix Variance.
- Increase Direct Labor Efficiency. This can be done through training, updating or maintaining machines and equipment, and focusing on the problems that come up in production so they can be avoided.
- Decreasing overproduction of a product, which is when not all of the product is used in one production run.
- Increasing Direct Labor Utilization, which is making sure all of the products that are on order can be produced within a time frame that does not cause them to go bad or become wasted on the shelf.
- Decreasing Direct Labor Re-work, which is when workers have to go back and fix a product that is not up to standard or needs more work before it can be sold.
- Decreasing Direct Labor Inspection, which is when workers have to check each product they produce compared with the specifications of the product.
- Decreasing Direct Labor Scrap, which is when a worker has to throw away a product that they have produced because it is not up to the specifications.
- Decreasing Direct Labor Stock, which is when workers have to hold products for customers for when they want them instead of selling them immediately.
The Bottom Line
Direct Labor Mix Variance shows how much production is wasted and can be used as a tool to decrease Direct Labor Mix Variance. There are several ways Direct Labor Mix Variance can be decreased, but these require training and maintenance of equipment and processes to ensure that they keep working efficiently and the workers need to be motivated. The more Direct Labor Mix Variance is decreased, the less wasted resources are on production, and the better chance there is that products will be produced within their optimal amount of time.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.