When labor cost misses the standard, you want to know whether the workers were paid the wrong rate or worked the wrong number of hours — or both. The direct labor variance answers that. It splits the total labor gap into two pieces: the labor rate variance and the labor efficiency variance. This walkthrough does both with one worked example so you can see the numbers move.
The Two Variances and Their Formulas
The split mirrors the materials variance, but with hours and wage rates in place of yards and prices.
Direct labor rate variance — how much of the gap was paying a different hourly rate than the standard:
DLRV = (AR − SR) × AH
where AR is the actual average rate per hour, SR is the standard rate, and AH is the actual hours worked.
Direct labor efficiency variance — how much of the gap was working more or fewer hours than the standard allowed for the units made:
DLEV = (AH − SH allowed) × SR
where AH is actual hours worked, SH allowed is the standard hours per unit times units produced, and SR is the standard rate.
Sign convention: actual greater than standard means unfavorable (U); actual less than standard means favorable (F).
The pattern: the rate variance varies only the rate (hours fixed at actual). The efficiency variance varies only the hours (rate fixed at standard). That separation is what makes the variance actionable — one piece belongs to HR/payroll and one piece belongs to the production floor.
The Setup: A Custom Furniture Shop
A workshop builds dining chairs. The labor standard is:
- 2 hours of labor per chair at a standard rate of $25 per hour
- Standard labor cost per chair = $50
In May, the shop:
- Produced 600 chairs
- Worked 1,260 actual hours (the timesheet total)
- Paid $26.50 per hour (the actual average wage, $33,390 in payroll)
Set up the two reference numbers. The standard hours allowed for 600 chairs is 600 × 2 = 1,200 hours. Actual hours were 1,260 — 60 hours over. The actual rate was $26.50 versus a standard of $25 — $1.50 over. Both pieces will come out unfavorable; the formulas will tell you by how much.
Computing the Rate Variance
DLRV = (AR − SR) × AH
DLRV = ($26.50 − $25.00) × 1,260 = $1.50 × 1,260 = $1,890 Unfavorable
The labor rate variance is $1,890 U. The shop paid an average of $1.50 more per hour than the standard assumed, and that excess applied to every one of the 1,260 hours actually worked.
This variance lives with whoever sets pay and assigns crews. Common causes: scheduling a senior worker into a job the standard expected a junior worker to do, an unplanned wage raise, or overtime hours paid at a premium. The rate variance is not really a comment on how hard people worked — it is a comment on what mix of people did the work, and at what wage.
Computing the Efficiency Variance
DLEV = (AH − SH allowed) × SR
DLEV = (1,260 − 1,200) × $25 = 60 × $25 = $1,500 Unfavorable
The labor efficiency variance is $1,500 U. The crew used 60 more hours than the standard allowed for 600 chairs. Priced at the standard rate of $25, that extra time cost the shop $1,500.
This variance is about the floor. Possible drivers: a poorly maintained machine, low-quality raw material that takes longer to work with, an inexperienced crew, or simply a bad day. Again the efficiency variance is priced at the standard rate to keep it clean — the rate gap has its own variance.
A subtle interaction sometimes hides in this number. Putting senior workers on a junior task (pushing the rate variance unfavorable) can also make the work go faster (pulling the efficiency variance favorable). Read the two variances together, not in isolation.
Putting the Pieces Together
Total direct labor variance for May:
| Variance | Amount | Direction |
|---|---|---|
| Rate variance | $1,890 | Unfavorable |
| Efficiency variance | $1,500 | Unfavorable |
| Total | $3,390 | Unfavorable |
Cross-check: actual labor cost was $33,390. Standard cost allowed for 600 chairs is 1,200 hours × $25 = $30,000. The gap is $3,390 — exactly the sum of the two variances. The shop paid too much per hour and used too many hours, and the variances quantify each.
If only one piece had been unfavorable the conclusion would be cleaner. A rate variance close to zero with a large unfavorable efficiency variance would point firmly at production. A clean efficiency variance with a large unfavorable rate variance would point at the wage structure or the staffing decision.
A Common Trap: Hours Worked vs. Hours Paid
Most problems treat them as equal. They are not always. A worker can be paid for hours not worked — paid breaks, idle time waiting on materials. When a problem distinguishes between hours paid and hours worked, the rate variance uses hours paid (since the rate applied to every hour of payroll), and the efficiency variance uses hours worked on production (since only productive hours can go into making units). Mis-routing those two numbers is the single most common error here.
Getting Help
The rate-and-efficiency split is the same structure as the price-and-quantity split in the direct materials variance walkthrough. For the bigger picture of what a standard cost is and why companies set them, see standard costing explained.
Conclusion
The direct labor variance is one cost gap split two ways. The rate variance answers whether labor was paid more or less per hour than the standard, applied to the actual hours worked. The efficiency variance answers whether more or fewer hours were spent on the units produced than the standard allowed, priced at the standard rate. Together they reconstruct the total labor variance and tell you whether the problem to chase is sitting in payroll or out on the production floor.
