Labor Rate Variance Calculator

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 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 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.

Formula

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

Labor Rate Variance Calculator

Calculator

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.

Actual Hours

It means the total number of hours actually worked.

Example

Assume that the actual rate per hour of company A is $25.2 and company B is $30 (both operating in the same industry). While 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 are thus:

Company A = (24 – 25.2) * 32000 = $38,400 (U)

Company B = (24 – 30) * 32000 = $192,000 (U)

Explanation

Both the companies are incurring unfavorable variances but the amount varies significantly. Company A has a LRV of $38,400 while company B has a LRV of $192,000. Company B should make proper arrangements for finding 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



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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