Labor Rate Variance
It is a variance that takes place due to differences in the actual and standard rate of labor for actual hours worked. Similar to other variances, labor rate variance (LRV) also results in either a favorable variance or unfavorable variance. When the actual payment on the same level of labor hours worked is less than what we have expected, it results in a positive or favorable variance. Same way, when the actual payment made to the workers for their same level of work is more than the standard or budgeted payment, it is a negative or unfavorable variance. The labor rate variance calculator is an online tool for calculating such variances. Favorable variances are denoted by F, while unfavorable variances are denoted by U.
There could be various reasons for both favorable and unfavorable variances. A favorable variance may not always be good and vice versa. But the point to focus on here is how the company arrives at the standard rate for analyzing the variances. The various factors looked after for determining the standard rate include payment made to laborers engaged in the production of goods, any expected increment during the period, etc. Even after considering these contingencies, the rate so arrived varies in practice, then there is a need to calculate and understand the reason for the variance. Such variance could be due to the rate of wages or the number of hours worked. Here we are talking about variance only on account of Labor Rate.
The formula for calculating labor rate variance is as follows:
Labor Rate Variance = (SR – AR) * AH
Where SR = Standard Rate per Hour
AR = Actual Rate per Hour
AH = Actual Hours
How to Calculate using Calculator?
The user is supposed to enter the following data into the labor rate variance calculator for a quick calculation:
Standard Rate per Hour
Enter the amount of the standard rate. As stated above, the standard rate is the expected rate that requires consideration of various factors. It is crucial for the company to make a realistic estimate for determining the standard rate.
Actual Rate per Hour
Enter the actual per hour rate of payment. This is the rate at which the labor actually gets payment.
It means the total number of hours actually worked.
Assume that the actual rate per hour of company A is $25.2 and company B is $30 (both operating in the same industry). At the same time, the standard rate of labor for both companies is $24 per hour, which is incidentally the rate applicable for the industry too. The working hours of both companies, company A and company B, are 32,000 hours. The labor rate variance of both the companies is thus:
Company A = (24 – 25.2) * 32000 = $38,400 (U)
Company B = (24 – 30) * 32000 = $192,000 (U)
Both the companies are incurring unfavorable variances, but the amount varies significantly. Company A has a LRV of $38,400, while company B has an LRV of $192,000. Company B should make proper arrangements to find the reasons for variances as the amount is comparatively high. But company A should prefer to ignore these variances, as the cost of investigation may turn out to be more than the variances themselves.
To know more about LRV, refer to our article – Labor Rate Variance.