Overview of labor cost variance formula

The labor cost variance is the difference between the actual labor cost and the standard labor cost for the production achieved. The labor cost is commonly expressed in terms of the hourly rate of the employees. The general formula for this is expressed below:

$Labor Cost Variance = (Standard Hours \times Standard Rate) - (Actual Hours \times Actual Rate)$

Same as with the DM Cost Variance, it should be noted that the $Standard Hours (SH)$ used in this computation is not the same as the budgeted hours in the master budget. Explained simply, this is the standard hours of direct labor expected to be used based on actual production volume. It will be explained further when we discuss the labor efficiency variances.

The labor cost variance is broken down into different components to isolate the sources of deviations of actual labor costs from standard labor costs. The variance primarily arises from two sources:

differences between the standard rate and the actual rate paid for labor (labor rate variance); and
differences between the standard hours allowed and the actual hours worked (labor efficiency variance). Similar to materials, the labor efficiency variance can be further subdivided into labor mix variance and labor yield variance when multiple types of labor are used in production, as these factors also impact total labor costs.

Overview of variance formula

The total of all calculated labor variances should equal the overall labor cost variance. This provides a useful way to verify the accuracy of your calculations by comparing the sum of the individual variances to the total labor cost variance.

Formulas and variable definitions for labor cost, rate, efficiency, mix, and yield variances. — Labor Variances Overview

Labor Cost Variance

Difference: actual labor cost vs. standard labor cost for actual production
Formula: (Standard Hours × Standard Rate) − (Actual Hours × Actual Rate)
Standard Hours: based on actual production, not master budget hours

Components of Labor Cost Variance

Labor rate variance: difference between standard rate and actual rate paid
Labor efficiency variance: difference between standard hours allowed and actual hours worked
- Can be further split into labor mix variance and labor yield variance (when multiple labor types used)

Variance Formula Overview

Total labor cost variance = sum of all individual labor variances
Used to verify calculation accuracy

Overview of labor cost variance formula

$Labor Cost Variance = (Standard Hours \times Standard Rate) - (Actual Hours \times Actual Rate)$

The labor cost variance is broken down into different components to isolate the sources of deviations of actual labor costs from standard labor costs. The variance primarily arises from two sources:

differences between the standard rate and the actual rate paid for labor (labor rate variance); and
differences between the standard hours allowed and the actual hours worked (labor efficiency variance). Similar to materials, the labor efficiency variance can be further subdivided into labor mix variance and labor yield variance when multiple types of labor are used in production, as these factors also impact total labor costs.