What is Labor Rate Variance?
Labor rate variance shows whether a company paid more or less per hour of direct labor than the standard wage rate. It isolates the pay-rate effect from the hours-worked effect, so managers can see if actual wages diverged from the budgeted rate.
Labor rate variance equals (Actual Rate − Standard Rate) × Actual Hours worked. A positive result is unfavorable (paid more per hour than planned); a negative result is favorable.
- •Paid workers more per hour than standard
- •Raises total labor cost
- •May signal overtime pay, higher skill mix, or wage inflation
- •HR/production should review pay-rate decisions
- •Paid workers less per hour than standard
- •Lowers total labor cost
- •May signal use of junior staff or reduced overtime
- •Check that quality/output was not compromised
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Step-by-step worked examples
Standard wage rate is $15/hr. Workers were actually paid $16/hr for 500 hours worked. Find the labor rate variance.
AR − SR = $16 − $15 = $1 LRV = $1 × 500 = $500 Since AR > SR, the variance is $500 Unfavorable
Standard rate is $15/hr, but actual rate paid was only $13/hr for 800 hours.
AR − SR = $13 − $15 = −$2 LRV = −$2 × 800 = −$1,600 Since AR < SR, the variance is $1,600 Favorable
A crew of 1,200 actual hours was paid $14.50/hr against a standard of $14/hr.
AR − SR = $14.50 − $14 = $0.50 LRV = $0.50 × 1,200 = $600 Since AR > SR, the variance is $600 Unfavorable
Flashcards
Quick quiz
Q1.Standard rate is $12/hr, actual rate is $10/hr, actual hours are 600. What is the labor rate variance?
Q2.Which figure is always used for hours in the labor rate variance formula?
Q3.An unfavorable labor rate variance means the company…
Q4.Labor rate variance isolates which factor?
The full card deck, worked steps and AI-tutor support for “What is Labor Rate Variance?” are in Notek — study by hand before your exam.
Common mistakes
Using standard hours instead of actual hours in the formula. — Correct: Labor rate variance always uses actual hours worked, not standard hours.
Assuming a favorable rate variance is always good news. — Correct: A favorable rate variance from underpaying or understaffing can hurt quality or morale — investigate the cause.
Confusing labor rate variance with labor efficiency variance. — Correct: Rate variance is about pay per hour (AR vs SR); efficiency variance is about hours worked (AH vs SH).
Ignoring overtime premiums when computing the actual rate. — Correct: Include overtime pay in the actual rate calculation — it is a common driver of unfavorable rate variances.
FAQ
What is the formula for labor rate variance?
LRV = (Actual Rate − Standard Rate) × Actual Hours worked.
How do you calculate labor rate variance?
Subtract the standard hourly wage rate from the actual hourly rate paid, then multiply by the actual hours worked.
What are examples of labor rate variance?
Paying overtime at $1 above standard for 500 hours ($500 unfavorable), or hiring junior staff at $2 below standard for 800 hours ($1,600 favorable).
What does an unfavorable labor rate variance mean?
It means the actual hourly wage rate paid was higher than the standard rate, raising labor cost.