Labor Rate Variance

What is this formula?

Labor Rate Variance (LRV) measures the financial impact of paying a labor rate that differs from the standard rate established in the cost system.

A positive variance generally indicates labor costs higher than planned, while a negative variance indicates favorable labor cost performance.

When to use it

Use this formula to evaluate wage control, labor contract performance, staffing decisions, overtime effects, and workforce cost management.

Example

A company records the following labor data:

Actual Labor Rate = $28/hour

Standard Labor Rate = $25/hour

Actual Hours Worked = 1,200 hours

Formula:

LRV=(AR-SR)AH

Substitution:

LRV=(28-25)×1,200

LRV=3,600

Result:

Labor Rate Variance = $3,600 unfavorable

Applications

Standard costing systems

Payroll analysis

Labor cost control

Manufacturing accounting

Workforce management

Note

Labor Rate Variance is a managerial accounting metric rather than a physical law. The result can be affected by wage negotiations, overtime premiums, labor market conditions, employee skill levels, and workforce composition. Different organizations may classify favorable and unfavorable variances using different sign conventions.