Calculate a direct-labour rate variance
Measure the cost effect of paying an actual hourly rate different from the standard rate for actual hours worked.
Section 4.2 · Standard costing
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. Topic 4.2 teaches standard costing, the listed material, labour, fixed-overhead and sales variances, their causes and relationships, and evidence-based business decisions. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use Topic 2.1–2.2 cost behaviour, contribution and absorption-costing ideas. In each question, identify the period, actual output, budget and standard before calculating a variance.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A labour-rate variance isolates the difference in…
What you will learn
- Apply the direct-labour rate formula
- Use actual hours for the rate comparison
- Investigate the reason for a rate difference
Hold actual hours constant
Labour-rate variance = (standard hourly rate − actual hourly rate) × actual hours. This compares what the same actual hours would cost at the standard rate with what they actually cost. A higher actual rate creates an adverse cost variance; a lower rate creates a favourable one.
Separate the rate effect from the number of hours. Do not multiply the rate difference by standard hours allowed; that would mix the price/rate change with the efficiency comparison.
Rate differences need context
Overtime premiums, skill mix, pay changes, temporary staff or an updated agreement can alter the actual average rate. A rate variance is an average monetary difference; it does not show whether the additional skills improved output or quality.
Check hours by employee category and task, overtime records and applicable pay agreements. Avoid recommending lower pay without considering fairness, retention, legal requirements and operational effects.
Pause and explain
SR is $12/hour; AR is $11.50/hour; actual hours are 1,600. What is the variance?
Worked example
Standard rate is $15 per hour. Actual workers completed 2,400 hours at an average $15.75. Calculate the rate variance.
Show the worked solution
- Rate difference = $15 − $15.75 = −$0.75 per hour.
- Multiply by actual 2,400 hours: −$0.75 × 2,400 = −$1,800.
- Actual labour cost is higher for the same hours, so the result is adverse.
Answer $1,800 adverse labour-rate variance.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Standard wage is $18/hour. Actual hours are 900 at $19.20/hour. Calculate the rate variance.
Give me a hint
Find the per-hour difference, then apply it to actual hours.
Compare my reasoning
- Rate difference = $18 − $19.20 = −$1.20.
- Multiply by 900 actual hours: $1.20 × 900 = $1,080.
- Actual labour costs more than standard for those hours.
$1,080 adverse labour-rate variance.
Look for these in your work
- Use actual hours
- Rate difference is $1.20 adverse per hour
- Variance equals $1,080 adverse
The standard rate is $14.40/hour. Actual labour cost is $25,920 for 1,800 hours. Calculate the rate variance.
Give me a hint
First find the actual hourly rate from actual cost ÷ actual hours.
Compare my reasoning
- Actual rate = $25,920 ÷ 1,800 = $14.40.
- Rate difference is zero.
- There is no labour-rate variance.
$0 labour-rate variance.
Look for these in your work
- Actual rate derived correctly
- Rates compared
- Zero variance stated
A hotel has an adverse rate variance because more senior staff covered difficult events. What other evidence should its manager consider?
Give me a hint
Compare event complexity, service outcomes, staffing rules and efficiency.
Compare my reasoning
- Check whether event mix or guest needs differed from the standard assumption.
- Review service quality, safety and guest feedback for the extra senior cover.
- Compare labour hours and overtime as a separate efficiency/capacity question before changing the staffing plan.
The higher rate may have bought needed expertise. Consider event complexity and service quality, then review hours and cost together before recommending a staffing change.
Look for these in your work
- Context checked
- Quality considered
- Rate separated from hours
Common mistakes
- Using standard hours allowed instead of actual hours
- Ignoring overtime premiums embedded in average rate
- Calling a higher skilled-worker rate a performance failure without checking output
What can you explain now?
Which hours are used in a labour-rate variance?
Compare with the explanation
Actual hours worked
The rate effect applies to the hours actually paid.
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Make it stick
Why does a labour-rate variance use actual hours?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.