Cost Accounting

Direct Labour Rate Variance

What is Direct Labour Rate Variance?

The Direct Labour Rate Variance measures the difference between the actual labour rate paid to the budgeted/standard labour rate.

Formula = (Actual Labour Rate - Budgeted/Standard Labour Rate) * Actual Direct Labour Hours Used

(Note: You do not need to remember this as this is included in your formula sheet)

Unfavourable and Favourable Direct Labour Rate Variances

Favourable - the actual labour rate is lower than the budgeted/standard labour rate, resulting in a negative answer

Unfavourable - the actual rate is higher than the budgeted/standard labour rate, resulting in a positive answer.

Possible Reasons for Direct Labour Rate Variances

Favourable:
- The business employed more junior or younger employees who did not require higher wages

Unfavourable:
- The business used up many overtime hours
- Employees were awarded higher wage rises by their union
- The business used more skilled labour who require higher wages

Worked Example: Direct Labour Rate Variance

Cool Waters are a bottled water manufacturing company. In their last financial year, they planned to used 200 labour hours at $18 an hour but ended up using 250 hours at $17 an hour.

Calculate the Direct Labour Rate Variance.

Formula = (Actual Labour Rate - Budgeted/Standard Labour Rate) * Actual Direct Labour Hours Used

= (17-18)*250

= -$250

The answer is negative, hence it is favourable.

= $250 Favourable

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