# Direct Labor Rate Variance

Direct labor rate variance (also called direct labor price or spending variance) is the difference between the total cost of direct labor at standard cost (i.e. direct labor hours at standard rate) and the actual direct labor cost.

This is the same as the product of:

• the actual direct labor hours, and
• the difference between the standard direct labor rate and actual direct labor rate.

Direct labor rate variance is very similar in concept to direct material price variance.

## Formula

As described in the definition, the formula to calculate direct labor rate variance is:

Direct Labor Rate Variance
= Actual Direct Labor Hours at Standard Cost – Actual Direct Labor Cost
= AH × SR – AH × AR
= (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 as calculated above, 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 a lower wage rate, the direct labor rate variance will be favorable however, such workers will likely 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 130. Is the variance favorable or unfavorable?

### Solution

 Standard Rate \$ 18.00 − Actual Rate 17.20 Difference Per Hour 0.80 × Actual Hours 130 Direct Labor Rate Variance \$104

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

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