What is a standard labor rate?

There are two definitions of the standard labor rate concept, which are as follows:

• Cost basis. 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. It is also used to calculate the cost of ending inventory and the cost of goods sold under the standard costing system.
• Price basis. 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.

In both cases, 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.

The information needed to derive a standard labor rate includes:

• Employee pay rates per hour
• Shift differential pay rates per hour
• Expected overtime levels
• Expected piece rate pay per unit produced
• Benefit costs per hour
• Payroll tax percentage related to the pay per hour

Related Topics

How to calculate cost per unit
Standard costing
What is a plant-wide overhead rate?
What is full costing?
What is marginal cost?