Labour Rate Variance Formula

Labour Rate Variance Formula

Labour rate variance formula is given below; the formula has been further explained with examples.

Actual Hours of Labour x (Actual Rate- Standard Rate)

Labour Rate Variance Formula Example

Total Actual Labour Taken on production project= 7000

Total Number of Unit produced by Company = 2000 units

Standard Labour required for single unit = 8 hr

Standard Labour Hour Rate = $8

Actual Labour Cost = 70,000

Calculate Labour rate Variance

Solution

Actual Cost per unit = 70,000/7000=10

Actual Quantity x (Standard Rate – Actual Rate)

= 7000 x (8-10)

= 7000 x -2

= -14,000 (unfavorable)

Labour rate variance is basically difference between Rates of Labour i.e. the standard rate of and actual rate. Such difference is multiplied by actual labour hours.

Favorable and unfavorable Labour rate Variance

Labour rate variance may be favorable or unfavorable. if actual rate is more than standard rate of  labour, then this will result in unfavorable rate variance, otherwise it would be favorable rate variance. This relationship can be logically expressed as under

Actual Labour rate > Standard Labour Rate= (Unfavorable Labour Rate Variance)

Actual Labour Rate < Standard Labour Rate= (Favorable Labour Rate Variance)

Reasons for Adverse Labour Rate Variance

Reasons for adverse or unfavorable rate variance may include use of high skilled labour during the production, general inflation trend in the economy and raise of labour demand in the economy. It is important to note that adverse labour rate result due to increase in the prices of labour and aforesaid reasons are primarily reason for increased labour prices.

 Reasons for favorable Labour rate Variance

Reasons for unfavorable labour rate variance include use of unskilled labour rate, deflation in the economy and unemployment in the economy or industry. It is pertinent to mention that favorable labour rate variance result due to decrease in the price of labour, therefore aforesaid reason are basically reasons of decrease in the labour rate.

Other Related Formulas

Material Price Variance Formula
Labour Efficiency Variance Formula 
Labour Rate Variance Formula
Material Price Variance Formula