Labor rate variance measures the cost effect of paying a different hourly wage than the standard you budgeted. It isolates the price of labor from the quantity used — its partner, labor efficiency variance, handles the hours side.
The formula
Labor rate variance = (Actual rate − Standard rate) × Actual hours worked
Standard rate $20/hour; the month’s 5,000 actual hours averaged $22 → (22 − 20) × 5,000 = $10,000 unfavorable. If the average had been $19, the variance would be $5,000 favorable.
What actually causes it
Overtime premiums during rush periods; using senior (pricier) staff on junior-grade work; market wage rises not yet reflected in standards; new-hire premiums in tight labor markets — or on the favorable side, a shift toward cheaper labor grades. The classification of which workers count here at all is the direct/indirect split covered in Direct vs Indirect Labor.
Read it with its partner
Rate and efficiency variances often move in opposite directions and only make sense together: hiring cheaper workers shows a favorable rate variance — and frequently an unfavorable efficiency variance as the less-experienced crew takes more hours per unit. A favorable rate paired with worse efficiency may cost more in total than the “expensive” crew did. Judge the pair, not either alone; total labor cost per good unit is the number that decides.
Who is responsible for labor rate variance?
Usually HR/management decisions on hiring, scheduling and overtime — not the workers or line supervisors who drive efficiency variance.
Why multiply by actual hours instead of standard hours?
The rate difference was paid on every hour actually worked — actual hours measure the real exposure to the wage gap.
Is overtime part of rate or efficiency variance?
The premium portion of overtime pay hits the rate variance; the extra hours themselves hit efficiency.