Labor Rate Variance Example

When there is difference between standard rate of paying laborers and actual rate of paying laborers, at that time, labor rate variance happens. Labor rate variance may be either favorable or unfavorable. If our actual rate of paying to laborers is more than standard rate of paying to laborers, it will be unfavorable rate variance. We have to find the reasons of unfavorable labor rate variance. If our actual rate of paying to laborers is less than standard rate of paying to laborers, it will be favorable labor rate variance. It shows, we have to deal with laborers efficiently. We follow this system for more saving of company's money.

Labor Rate Variance Formula = Actual Time ( Standard Rate - Actual Rate )

Now, we explain labor variance with example

Calculate labor rate variance from given information :

Gross Direct Wages = $ 3000
Standard hours produced = 1600
standard rate per hour = $ 1.50

Actual hours paid 1500 hours.

First of all we have to calculate actual rate per hour of wages = Actual labor cost/ Actual hours worked

= $ 3000 / 1500 hrs = $ 2 per hour

Now, we will calculate labor rate variance = 1500 hrs ( $ 1.50 - $ 2.00 ) = $ 750 ( Unfavorable)

This labor rate variance is unfavorable because we have paid to each laborer more than what is our standard rate per hour for paying laborers. There may be lots of reasons of this. Labor organization has increased by  $ 0.50 per hour or we have hired laborers at high rate. So, this variance will be very helpful for company for reducing the cost of laborers. 

Sometime, We have to calculate missing figures before calculating labor rate variance. See this example 

Calculate labor rate variance from following information:

Standard  Actual
Nos. of men employed  100  90
Output in units  5000  4800
 Number of working
days in a month
 20  18
Average wages per man per
 $ 200  $ 198

First, we calculate standard rate, actual rate standard t ime and actual time which are not directly given in the question. 

Actual wages per man per month 

= Standard wages per man per month / standard working days in month 

= $ 200 /20 = $ 10

Actual working days in a month 

= Actual rate per day = actual wages per man per month / actual working days in a month 

= $ 198 / 18 = $ 11

Actual man days = number of men X working days = 90 X 18 = 1620 man days

Labor Rate Variance = 1620 man days ( $ 10 - $ 11 ) = $ 1620 (Unfavorable)

Related : Material Yield Variance Example






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Accounting Education: Labor Rate Variance Example
Labor Rate Variance Example
Accounting Education
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