Labor rate variance is a calculation that is related to the labor rate decided by the management. it can be defined as the difference between the standard labor rate and the actual labor rate that is paid to the employees multiplied by total number of working hours. The formula of labor rate variance can be shown as under:-
Labor Rate Variance = (Actual Labor Rate Paid – Standard Labor Rate) x Actual Hours of working
If the calculated variance is unfavorable for the management it means that labor cost becomes more than anticipated and it is considered to be an extra expense. On the other hand if the labor rate is favorable that means that the hired labor is not expensive and labor expense is less than anticipated. The information calculated from the labor rate variance can be used for the future planning for the hiring of labor and the rate of the labor. Moreover the labor rate variance can also be used to find out the efficiency of the work done by the hired labor.
There are a number of certain reasons that may result in labor rate variance. These reasons can be explained as under:-
- Incorrect Standards that are not showing the changes in the labor rate that has been brought recently
- Premiums pays that may be paid additional to the labor rate due to over timings and extra shift working
- Component tradeoff regarding the products that may require extra working from the labor hence results in extra labor rate to be paid.