What is Labor Rate Variance?
Labor rate variance measures the difference between what was paid per hour and what was budgeted per hour, multiplied by actual hours worked. It isolates the price (rate) effect of labor cost variance from the volume (efficiency) effect.
How It Works
- Formula: (Actual rate − Standard rate) × Actual hours worked
- Favorable: actual rate is lower than standard
- Unfavorable: actual rate is higher than standard
- Causes: overtime, hiring mix, wage agreements, skill substitution
- Reported alongside labor efficiency variance for the full picture
Saudi Context
Saudi manufacturers and contractors track labor rate variance because labor costs are influenced by Saudization quotas, GOSI contributions, end-of-service liabilities, and overtime regulations under the Saudi Labor Law. The variance flags wage-policy and staffing-mix issues early.
Example
A Saudi assembly plant standard rate is SAR 30/hour; actual rate is SAR 33/hour (due to higher overtime); actual hours worked = 10,000. Labor rate variance = (33 − 30) × 10,000 = SAR 30,000 unfavorable — flagged for action by operations and HR.