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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.

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