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Direct Labor Rate Variance:

Definition and Explanation:

The price variance for direct labor is commonly termed as labor rate variance. This variance measures any deviation from standard in the average hourly rate paid to direct labor workers.

If the actual amount paid to workers is more than the standard amount allowed, an unfavorable labor rate variance occurs. On the other hand, if the amount actually paid to workers is less than the standard allowance, a favorable labor rate variance occurs.

Formula:

Following formula is used to calculate labor rate variance.

Labor rate variance = (Actual hours worked Actual rate) - (Actual hours worked Standard rate)

Example:

Assume that 1,880 hours are worked at a rate of $6.50 per hour to produce 530 equivalent units of product. The standard labor rate per hour is $6.00.

Required: Calculate direct labor rate variance.

Solution:

  Time Rate = Amount
Actual hours worked at actual rate 1,880   $6.50 actual   $12,220
Actual hours worked at standard rate 1,880   6.00 standard   $11,280
     
 
      $0.50   $940 unfav.
     
 

The labor rate variance is unfavorable because the actual rate paid to workers is more than the standard rate.

Reasons of Unfavorable Labor Rate Variance:

Rates paid to the workers are usually predictable. Nevertheless, rate variances can arise through the way labor is used. Skill workers with high hourly rates of pay may be given duties that require little skill and call for low hourly rates of pay. This will result in an unfavorable labor rate variance, since the actual hourly rate of pay will exceed the standard rate specified for the particular task. In contrast, a favorable rate variance would result when workers who are paid at a rate lower than specified in the standard are assigned to the task. However, the low pay rate workers may not be as efficient. Finally, overtime work at premium rates can be reason of an unfavorable labor price variance if the overtime premium is charged to the labor account.

Who is Responsible for the Labor Rate Variance?

Since rate variances generally arise as a result of how labor is used, production supervisors bear responsibility for seeing that labor price variances are kept under control.

Relevant Articles:

Definition and Explanation of Standard Cost
Purposes and Advantages of Standard Costing System
Setting Standards
Materials Price Standard
Materials Price Variance
Materials Quantity Standard
Materials Quantity Variance
Direct Labor Rate Standard
Direct Labor Rate Variance
Direct Labor Efficiency Standard
Direct Labor Efficiency Variance
Factory Overhead Cost Standards
Overall or Net Factory Overhead Variance
Overhead Controllable Variance
Overhead Volume Variance
Overhead Spending Variance
Overhead Idle Capacity Variance
Overhead Efficiency Variance
Variable Overhead Efficiency Variance

Fixed Overhead Efficiency Variance

Mix and Yield Variance
Variance Analysis Example
Standard Costing and Variance Analysis Formulas
Management by Exception and Variance Analysis
International Uses of Standard Costing System
Advantages, Disadvantages, and Limitations of Standard Costing

 

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
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  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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