Rate Variance Calculation

Rate Variance Calculator

Calculation Result

function calculateRateVariance() { var actualRate = parseFloat(document.getElementById('actualRate').value); var standardRate = parseFloat(document.getElementById('standardRate').value); var actualQty = parseFloat(document.getElementById('actualQty').value); var resultDiv = document.getElementById('varianceResult'); var varianceOutput = document.getElementById('varianceOutput'); var statusOutput = document.getElementById('statusOutput'); if (isNaN(actualRate) || isNaN(standardRate) || isNaN(actualQty)) { alert("Please enter valid numerical values in all fields."); return; } // Formula: (Actual Rate – Standard Rate) * Actual Quantity var variance = (actualRate – standardRate) * actualQty; var absVariance = Math.abs(variance).toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); resultDiv.style.display = "block"; varianceOutput.innerText = "Total Variance: " + absVariance; if (variance > 0) { resultDiv.style.backgroundColor = "#fdecea"; varianceOutput.style.color = "#c0392b"; statusOutput.innerHTML = "UNFAVORABLEYou spent more per unit than budgeted."; } else if (variance < 0) { resultDiv.style.backgroundColor = "#eafaf1"; varianceOutput.style.color = "#27ae60"; statusOutput.innerHTML = "FAVORABLEYou spent less per unit than budgeted."; } else { resultDiv.style.backgroundColor = "#f4f6f7"; varianceOutput.style.color = "#7f8c8d"; statusOutput.innerHTML = "NEUTRALActual rate matches the standard rate perfectly."; } }

Understanding Rate Variance

Rate variance, often referred to as labor rate variance or price variance in accounting, is a critical metric used in standard costing. It measures the difference between the actual price paid for an input (like labor or raw materials) and the expected or "standard" price that was budgeted for that input.

The Rate Variance Formula

Rate Variance = (Actual Rate – Standard Rate) × Actual Quantity

Components of the Calculation

• Actual Rate: The real price paid per unit of material or the hourly wage paid to employees.
• Standard Rate: The pre-determined or budgeted cost that the company expected to pay.
• Actual Quantity: The total volume of units used or the total number of labor hours worked during the period.

Interpreting the Results

There are two primary outcomes for a rate variance calculation:

1. Unfavorable Variance: Occurs when the actual rate is higher than the standard rate. This indicates that costs exceeded expectations, which could be due to emergency purchases, market price hikes, or hiring more expensive skilled labor than planned.
2. Favorable Variance: Occurs when the actual rate is lower than the standard rate. This suggests cost savings, potentially from bulk discounts, favorable market conditions, or utilizing junior staff for specific tasks.

Practical Example

Imagine a construction firm that budgeted a labor rate of 20.00 per hour for a project (Standard Rate). Due to a shortage of workers, they had to pay 22.00 per hour (Actual Rate). If the team worked 1,000 hours (Actual Quantity):

• Rate Variance = (22.00 – 20.00) × 1,000
• Rate Variance = 2.00 × 1,000
• Rate Variance = 2,000 (Unfavorable)

In this case, the company spent 2,000 more than planned purely because of the change in the hourly rate, regardless of how efficient the workers were.