Why We Use Standard Labor Rates Instead of Actual Labor Rates
To provide clear, consistent, and comparable job costing, we use standard labor rates rather than actual labor rates. This approach benefits both accuracy and transparency. Here are the key reasons:
1. Accurate Estimate vs. Actual Comparison
Estimates are built using standard labor rates. If actual costs use different (actual) rates, comparisons become misleading. Using the same standard rate ensures we are comparing performance – not rate differences.
2. Consistency Regardless of Who Performs the Work
Some jobs take the same number of hours regardless of whether they’re done by a higher-wage or lower-wage employee. Using actual rates would make identical work appear more or less profitable simply based on who performed it. Standard rates keep job costs consistent and fair.
3. Meaningful Job-to-Job Comparisons
When comparing similar jobs run at different times, labor conditions can vary. For example, one job may run during regular hours and another during overtime. Using actual rates could make the overtime job appear less profitable even if operationally it performed just as well. Standard rates allow true performance comparisons.
4. Avoiding Overtime Allocation Distortions
Actual labor introduces complexity around overtime allocation—should overtime apply to all jobs that week, only the job run on Friday when the OT occurred, or be manually reassigned to a specific job? These choices can distort job results. Standard rates eliminate this subjectivity and keep reporting clean and consistent.
In Summary:
Standard labor rates allow us to evaluate jobs based on efficiency and performance, not on wage variability, timing, or administrative decisions. This leads to clearer insights and more reliable job costing.
If you want help calculating your Standard Labor Rate, there is a Worksheet here.