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)
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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.
How to calculate standard Rate which is not given in the question
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