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.
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
Following formula is used to calculate labor rate
rate variance = (Actual hours worked ×
Actual rate) - (Actual hours worked ×
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.
Actual hours worked at actual
Actual hours worked at standard
The labor rate variance is unfavorable because
the actual rate paid to workers is more than the
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?
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.