Labor rate variance isolates one question: did the hours you actually used cost more or less per hour than the standard assumed? It separates the price of labor from the quantity of labor, which the efficiency variance handles.
The formula
Labor Rate Variance = (Actual Rate − Standard Rate) × Actual Hours Worked
Worked example
| Standard rate | $18.00/hour |
| Actual rate paid | $19.25/hour |
| Actual hours | 12,000 |
| Variance | ($19.25 − $18.00) × 12,000 = $15,000 unfavorable |
What actually moves it
Overtime premiums, using senior staff on junior-rated work, market wage rises the standard hasn’t caught up with, or rush hiring at premium rates. Occasionally the variance is favorable for bad reasons — cheaper, less-skilled labor that then blows up the efficiency variance with slow work and rework. The two variances are designed to be read as a pair: rate tells you about the price decision, efficiency about the deployment decision, and management accountability usually splits the same way (HR/procurement vs operations).
Same family: production volume variance for fixed overhead, and the unit product cost that all variances ultimately reconcile to.
FAQ
What is the difference between labor rate and labor efficiency variance? Rate variance = price per hour vs standard; efficiency variance = hours used vs standard hours allowed. Price versus quantity.
Who is responsible for labor rate variance? Typically whoever sets pay and staffing mix — HR, procurement, or scheduling — rather than line supervisors, who own efficiency.
Can a favorable rate variance be a bad sign? Yes: cheaper labor that works slowly or produces rework shifts the cost into the efficiency variance and quality costs.
Why multiply by actual hours, not standard hours? Because the rate difference was paid on every hour actually worked — actual hours is the exposure.