Standard hours allowed is the number of hours of production time that should have been used during an accounting period, which is based on the actual number of units produced, multiplied by the standard hours per unit. The concept is most commonly used in manufacturing operations where a large number of units are to be produced, and attaining a profit requires that close attention be paid to the number of hours of production.
The standard hours per unit is derived from the labor routing, which is a compilation of the normal amount of time expected to be required to manufacture a unit. The labor routing includes normal inefficiencies that are to be expected during the production process, such as downtime for machine setups, break time, and an allocation for time spent on units that are scrapped or reworked. Since this calculation is derived from a number of estimates, the resulting standard hours allowed figure is really just an approximation of what will actually happen.
The concept of standard hours allowed is usually based on a reasonable estimate of hours required to produce a product (sometimes called an attainable standard). However, some organizations prefer to use theoretical standards, which are only attainable under perfect conditions where there is no scrap, no setup inefficiency, no breaks, no rework, and so forth. If a company is using theoretical standards, the calculated amount of standard hours allowed will be reduced, which means that there is likely to be an unfavorable variance between that number and the actual number of hours allowed.
As an example of standard hours allowed, ABC International produces 500 green widgets during April. The labor routing states that each unit should require 1.5 hours of labor to produce. Therefore, the standard hours allowed is 750 hours, which is calculated as 500 units multiplied by 1.5 hours per unit.