Labour Rate Variance Calculation

Labour Rate Variance Calculator

function calculateLRV() { var actualRate = parseFloat(document.getElementById('actualRate').value); var standardRate = parseFloat(document.getElementById('standardRate').value); var actualHours = parseFloat(document.getElementById('actualHours').value); var resultDiv = document.getElementById('lrv-result'); var resultTitle = document.getElementById('resultTitle'); var resultValue = document.getElementById('resultValue'); var resultStatus = document.getElementById('resultStatus'); if (isNaN(actualRate) || isNaN(standardRate) || isNaN(actualHours)) { alert("Please enter valid numerical values for all fields."); return; } var variance = (actualRate – standardRate) * actualHours; var formattedVariance = Math.abs(variance).toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }); resultDiv.style.display = 'block'; resultValue.innerHTML = '$' + formattedVariance; if (variance > 0) { resultDiv.style.backgroundColor = '#fdf2f2'; resultTitle.style.color = '#c0392b'; resultTitle.innerHTML = "Unfavorable Variance"; resultValue.style.color = '#c0392b'; resultStatus.innerHTML = "You paid more per hour than the standard rate allowed."; } else if (variance < 0) { resultDiv.style.backgroundColor = '#f0fff4'; resultTitle.style.color = '#27ae60'; resultTitle.innerHTML = "Favorable Variance"; resultValue.style.color = '#27ae60'; resultStatus.innerHTML = "You paid less per hour than the budgeted standard rate."; } else { resultDiv.style.backgroundColor = '#f8f9fa'; resultTitle.style.color = '#7f8c8d'; resultTitle.innerHTML = "Zero Variance"; resultValue.style.color = '#2c3e50'; resultStatus.innerHTML = "The actual rate perfectly matches the standard rate."; } }

Understanding Labour Rate Variance (LRV)

Labour Rate Variance is a critical accounting metric used by businesses to measure the difference between the actual cost of direct labour and the standard cost that should have been paid for the actual hours worked. It isolates the price component of labour costs, helping managers understand if they are overpaying or saving money on employee wages.

The Labour Rate Variance Formula

Labour Rate Variance = (Actual Hourly Rate – Standard Hourly Rate) × Actual Hours Worked

Favorable vs. Unfavorable Variance

• Favorable Variance (Negative Result): This occurs when the actual rate paid to workers is lower than the standard (budgeted) rate. It indicates cost savings.
• Unfavorable Variance (Positive Result): This occurs when the actual rate is higher than the standard rate, leading to higher-than-expected project costs.

Practical Example

Suppose a manufacturing firm sets a standard rate of $20.00 per hour for assembly workers. During a busy month, they hire temporary workers at $23.00 per hour to meet demand. The team works a total of 500 hours.

Calculation: ($23.00 – $20.00) × 500 = $1,500 Unfavorable Variance.
In this scenario, the company spent an extra $1,500 due to the increase in hourly rates, regardless of worker efficiency.

Common Causes of Labour Rate Variances

1. Shift Differentials: Paying higher rates for night or weekend shifts.
2. Skill Mix: Using highly skilled (and more expensive) workers for tasks designed for junior staff.
3. Overtime Premiums: If overtime is calculated into the actual rate, it can inflate the variance.
4. Market Changes: Sudden increases in local minimum wages or competitive labour market pressures.
5. Poor Budgeting: Setting standard rates that do not reflect current economic reality.

Why Track This Metric?

Tracking LRV allows management to pinpoint exactly why labour costs are fluctuating. By separating the rate from the efficiency (how fast people work), a company can decide whether to renegotiate contracts, adjust their hiring strategy, or update their product pricing to maintain profitability.