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Labour rate variance – causes and formula.

Labour Efficiency Variance = Standard Wage Rate (Standard Hours of Production – Actual Hours Worked) OR LEV = SR x (SH – AHW)

Wage rate variance occurs due to the following causes:

  • Change in basic wage structure or change in piece work rate.
  • Overtime work in excess of that provided in the standard rate.
  • Use of different method of payment i.e. payment of day rates while standards are based on piece work method of remuneration.
  • The composition of a gang as regards the skill and rate of wages being different from that laid down in the standard. Wage rates are usually determined by factors beyond the control of the personnel department such as conditions in the labour market, wage awards by wage boards, etc.
  • Higher wages paid on account of overtime for urgent work.
  • Payment of guaranteed wages to workers who are unable to earn their normal wages if such guaranteed wages form part of direct labour cost
  • Employment of one or more workers of a different grade than the standard grade.
  • New workers not being allowed full normal wage rates.

Wage rate variances are therefore, mostly uncontrollable except for the portion which arises due to deployment of wrong grade of labour for which the departmental executive may be held responsible

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