How is the labour rate variance calculated?

The labour rate variance is calculated by subtracting the standard pay rate from the actual pay rate and then multiplying that difference by the actual hours worked. This method highlights the difference between what was actually paid to employees and what was expected to be paid based on the pre-established standard rates.

Calculating the labour rate variance this way helps management understand how efficiently labor costs are being managed. If the actual rate is higher than the standard rate, it indicates a negative variance, suggesting that labor costs are exceeding expectations. Conversely, if the actual rate is lower than the standard rate, it signals a positive variance, indicating better-than-expected cost control.

This calculation is crucial for businesses because it informs them about labor cost management and aids in making strategic decisions related to staffing and compensation. Understanding this variance allows management to take corrective actions, if necessary, to ensure labor costs align with budget projections.