What is Labor Rate Variance?
Labor Rate Variance (LRV) is otherwise called as labor Price Variance, labor Rate of Pay Variance and labor Wage Rate Variance. It is a part of direct labor cost variance.
Definition of LRV
According to ICMA, London,
“Labor Rate Variance is that portion of labor (Wages) variance which is due to the difference between the standard rate of pay specified and actual rate paid”.
Formula to calculate LRV
The following formula is used to calculate labor rate variance.
Labor rate variance = Actual Hours Booked or Actual Hours Taken x (Standard Rate – Actual Rate)
If the standard rate is more than the actual rate, the variance will be favorable, and on the other hand, if the standard rate is less than actual rate, the variance will be unfavorable or adverse.
Causes for labor Rate Variance
1. Employment of more efficient and skilled labor force demanding higher rate of wages.
2. Sometimes, there may be non-availability of labor force but they are demanding higher rate of wages.
3. There may be more availability of labor force and there is a chance of being payment of low rate of wages.
4. Employment of unskilled workers at lower rates might have caused less payment for wages.
5. The workers are allowed to work in over time. Since the overtime allowance is more than the normal time rate, more wages will be paid to workers.
6. Extra shift allowance may be paid to workers.
7. More bonus may be paid to workers.
8. Higher piece rate might have been paid for quality production.
9. Method of wage payment may be changed.
10. Some incentives or bonus schemes might have been introduced or withdrawn.
11. Grades of workers might have been revised.
12. Increase rate of wages based on the agreement made with trade union or according to the policy of Government.
13. Higher rate of wages may be paid during seasonal or emergency operations.
Generally, the wage rate is determined on the basis of demand and supply conditions of labor in the labor market. Hence, labor rate variance is uncontrollable. If the workers are selected wrongfully or employment of low grade or high grades of labors in the place of high grade or low grade of labors respectively, the production foreman will be responsible.