Business Glossary

any deviation from standard in the average hourly rate paid to workers:
Labor Rate = (Actual Rate - Standard Rate) ¥ Actual Hours of Labor Used Variance

For example, assume that the standard cost of direct labor per unit of product A is 2.5 hours ¥ $14 = $35. Assume further that during the month of March the company recorded 4500 hours of direct labor time. The actual cost of this labor time was $64,800, or an average of $14.40 per hour. The company produced 2000 units of product A during the month. The labor rate variance is ($14.40 - $14.00) ¥ 4500 hours = $1800, which is unfavorable since the actual hourly rate exceeded the standard rate. This may be the result of unavoidable increases in labor rates, or it may reflect excessive labor costs due to use of higher skilled labor commanding higher wages.