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Labor Rate Variance: Definition & Formula

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  • 0:05 Labor Variance Defined
  • 0:53 How to Compute a Labor…
  • 2:05 Labor Cost Variance Analysis
  • 2:35 Lesson Summary
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Lesson Transcript
Instructor: Anthony Aparicio

Tony taught Business and Aeronautics courses for eight years; he holds a Master's degree in Management and is completing a PhD in Organizational Psychology

Labor variances are the differences between the planned and actual costs of labor as they relate to a project. This lesson will go over the two types or labor variances and take you through the formula for computing them.

Labor Variance Defined

A labor variance is a type of cost variance that focuses on labor rates and hours. The comparison that is used to compute a labor variance compares standard versus actual rates and hours for workers, typically on a specific project. These computations are important because they help managers to analyze differences between planned and actual costs related to labor.

You can think of it, like you would if it was your personal budget. At the end of the month, you should go back over your actual spending to see how you did compared to your original plan. Based on your analysis, you may find that you need to change your budget because things changed, for better or worse, and adjust any unrealistic numbers. This way your future budgeting should be closer to your actual spending amounts.

How to Compute a Labor Variance

As a manager for a large firm that manufactures goods, your department employs many people that work in different parts of the production process. There are four basic pieces of information you'll need to collect before attempting to use the formula for computing labor variances. In this case these are hypothetical figures for the purpose of using the formula.

  • Actual hours (AH) = 4,200
  • Actual rate (AR) = $15
  • Standard rate (SR) = $14
  • Standard hours (SH) = 4,600

After collecting the necessary information described above, you are ready to substitute the numbers into the formula to compute the rate and hours (quantity) variances.

Step 1: The formula for the rate variance is:

(AH x AR) - (AH x SR)

Step 2: The formula for the quantity variance is:

(AH x SR) - (SH x SR)

Step 3: Combine the two in order to come up with the total direct labor variance:

Labor Rate Variance 2

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