What is a Standard Labor Rate?

A standard labor rate is either a pre-set cost at which labor is compiled in your accounting records, or a pre-set wage rate that billed to customers. This concept is commonly used in standard costing to compare actual wage rates incurred to the expected (standard) wage rate; this analysis is useful for deciding whether your business is paying too much for labor than you had anticipated.

There may be a number of standard labor rates, each one based on the general skill sets of the employees presumed to be engaged in the related work. If there is only a single standard labor rate, it should be based on a weighted average of the fully burdened labor costs of those employees most likely to be engaged in the related work.

Cost Basis Standard Labor Rate

The cost basis standard labor rate is the fully-burdened cost of labor that is applied to the manufacture of a product or the provision of services. This information is used to determine the profit derived from a sale, which assumes the inclusion of all applicable costs. This cost of labor is also used to calculate the cost of ending inventory and the cost of goods sold under a standard costing system.

Price Basis Standard Labor Rate

The price basis standard labor rate is the price per hour that is charged to a customer for services rendered. This price is comprised of a standard profit margin, as well as the provider's cost of labor and all labor-related overhead costs (such as benefits). This information is used for service billings, as well as to set long-term product prices. Conversely, a company may create a standard labor rate that is not based in any way on underlying costs, focusing instead on the rate that the market will accept.

Related AccountingTools Courses

Activity-Based Costing

Cost Accounting Fundamentals

Information Requirements for a Standard Labor Rate

The information needed to derive a standard labor rate includes the following:

Employee pay rates per hour. This is the standard rate paid per person, which will need to be adjusted if a labor contract causes pay rates to rise.
Shift differential pay rates per hour. This is a wage bump that is paid to someone working a less desirable shift (usually the second or third shift).
Expected overtime levels. This is a rough guess at the proportion of a person’s time that will be worked in excess of a 40-hour week. It is usually based on historical information.
Expected piece rate pay per unit produced. This pay rate may increase if a certain quantity threshold is surpassed, and may be reduced for any quality issues found.
Benefit costs (such as medical and dental insurance) per hour. In a union environment, benefit costs can exceed the amount of underlying labor costs.
Payroll tax percentage related to the pay per hour. Some payroll taxes are capped once a certain labor payout per person per year is reached, while other taxes have no cap.