Direct Labor Rate Variance

Direct labor rate variance (also called direct labor price/spending variance or wage rate variance) is the product of actual direct labor hours and the difference between the standard direct labor rate and actual direct labor rate. Direct labor rate variance is similar to direct material price variance. The following formula is used to calculate direct labor rate variance:

DL Rate Variance = ( SR − AR ) × AH

Where,
   SR is the standard direct labor rate
   AR is the actual direct labor rate
   AH are the actual direct labor hours

Analysis

Direct labor rate variance determines the performance of human resource department in negotiating lower wage rates with employees and labor unions. A positive value of direct labor rate variance is achieved when standard direct labor rate exceeds actual direct labor rate. Thus positive values of direct labor rate variance are favorable and negative values are unfavorable.

However, a positive value of direct labor rate variance may not always be good. When low skilled workers are recruited at lower wage rate, the direct labor rate variance will be favorable however, such workers will be inefficient and will generate a poor direct labor efficiency variance. Direct labor rate variance must be analyzed in combination with direct labor efficiency variance.

Example

Calculate the direct labor rate variance if standard direct labor rate and actual direct labor rate are $18.00 and $17.20 respectively; and actual direct labor hours used during the period are 800. Is the variance favorable or unfavorable?

Solution

Standard Rate$ 18.00
− Actual Rate17.20
Difference Per Hour0.80
× Actual Hours130
Direct Labor Rate Variance$104

Since the actual labor rate is lower than the standard rate, the variance is positive and thus favorable.

Written by Irfanullah Jan