Management Accounting · Reconciliation of budgeted and actual profit
Labour Rate and Efficiency Variances Explained
Updated 11 October 2026 · Fact-checked
The labour rate variance compares the actual cost of hours paid with the standard cost of those same hours. The labour efficiency variance compares actual hours worked with the hours allowed for actual output, valued at the standard rate. Adverse means actual cost was higher than standard; favourable means lower.
Understand Labour Rate and Efficiency Variances
A standard cost card says how much labour a unit should need and what each hour should cost. Labour variances show where actual results moved away from that standard. They help managers see whether a cost difference came from paying a different wage or from using a different number of hours.
The labour rate variance is about price. If you paid more per hour than the standard, the variance is adverse. If you paid less, it is favourable. It could come from overtime premiums, a pay rise, or using staff of a different grade.
The labour efficiency variance is about quantity of time. Work out how many hours the actual output should have taken at standard. Compare that with the hours actually worked. If workers took longer, it is adverse. The difference in hours is valued at the standard rate, not the actual rate.
The idle time variance is a related idea. Idle time is paid time when no work is done, for example during a machine breakdown or a shortage of materials. It is always adverse, because you pay for hours that produce nothing. When idle time is recorded separately, the efficiency variance uses only hours actually worked, and the rate variance uses hours paid.
Causes are linked. Using cheaper, less skilled staff may give a favourable rate variance but an adverse efficiency variance. Using skilled staff at higher pay may do the opposite. Exam questions often test whether you can spot this link.
Key formulas to remember
- Labour rate variance
- (Actual hours paid × standard rate) − (Actual hours paid × actual rate) = (SR − AR) × actual hours paid
- Positive result is favourable; negative is adverse. Use hours paid, which includes idle time.
- Labour efficiency variance
- (Standard hours for actual output − actual hours worked) × standard rate
- Positive is favourable; negative is adverse. Always use the standard rate.
- Standard hours for actual output
- Actual units produced × standard hours per unit
- Use actual output, not budgeted output.
- Idle time variance
- Idle hours × standard rate (always adverse)
- Actual hours paid − actual hours worked = idle hours.
- Total labour variance check
- Standard labour cost for actual output − actual labour cost = rate + idle time + efficiency variances
- Use this to check that your parts add up.
How to solve Labour Rate and Efficiency Variances questions
Use the same method for every labour variance question. Lay out the numbers first, then calculate.
- 1Write down the standard hours per unit and the standard rate per hour from the standard cost card.
- 2Calculate standard hours for actual output: actual units × standard hours per unit.
- 3Note the actual hours paid, the actual hours worked, and the actual total labour cost. Idle hours = paid − worked.
- 4Rate variance: standard cost of actual hours paid minus actual cost of those hours.
- 5Efficiency variance: (standard hours for actual output − actual hours worked) × standard rate.
- 6Idle time variance, if given: idle hours × standard rate, shown as adverse.
- 7Label each answer as favourable (F) or adverse (A) and check that the parts sum to the total labour variance.
- 8Read the question for what is asked: a number, F or A, or a likely cause.
Quickest way: Three-line labour variance box
When to use it: Use this in Section A questions where you must give one variance fast.
- Write three lines: Actual hours paid × actual rate; Actual hours paid × standard rate; Standard hours for actual output × standard rate.
- Rate variance is the difference between line 1 and line 2. If line 1 is bigger, it is adverse.
- Efficiency variance is the difference between line 2 and line 3 when there is no idle time. If line 2 is bigger, it is adverse.
- If idle time exists, use hours worked instead of hours paid in the efficiency comparison, and show the idle time variance separately.
Common mistakes in Labour Rate and Efficiency Variances
Using the actual rate to value the efficiency variance.
Students value the hours difference at whatever rate is in front of them.
Fix: Efficiency is a quantity variance. Always value hours at the standard rate.
Using budgeted output to find standard hours.
The budget figure is often the first number given.
Fix: Use actual units produced × standard hours per unit.
Ignoring idle time when calculating efficiency.
Students use hours paid for both variances.
Fix: Use hours paid for the rate variance and hours worked for the efficiency variance. Show idle time separately.
Getting the sign wrong (F or A).
Students subtract in the wrong order.
Fix: Ask yourself: did we spend more than standard, or use more hours than allowed? If yes, adverse.
Treating variances as independent when explaining causes.
Each variance is learned separately.
Fix: Look for trade-offs. Cheap, inexperienced labour can give favourable rate and adverse efficiency.
Worked examples
Example 1
A company makes 1,000 units. The standard is 3 hours per unit at $12 per hour. Actual hours paid and worked were 3,200 (no idle time) at a total cost of $41,600. Calculate the labour rate and efficiency variances.
Show the solution
- Standard hours for actual output = 1,000 × 3 = 3,000 hours.
- Actual hours at standard rate = 3,200 × $12 = $38,400.
- Rate variance = $38,400 − $41,600 = $3,200 adverse. (The actual rate is $41,600 ÷ 3,200 = $13 per hour.)
- Efficiency variance = (3,000 − 3,200) × $12 = $2,400 adverse.
- Check: standard cost = 3,000 × $12 = $36,000. Actual cost = $41,600. Total variance = $5,600 adverse = $3,200 + $2,400.
Answer: Labour rate variance $3,200 adverse; labour efficiency variance $2,400 adverse.
Example 2
A firm makes 500 units. The standard is 4 hours per unit at $10 per hour. Workers were paid for 2,100 hours at $10.50 per hour. Of these, 100 hours were idle because of a machine breakdown. Calculate the rate, idle time and efficiency variances.
Show the solution
- Standard hours for actual output = 500 × 4 = 2,000 hours.
- Hours paid = 2,100; idle = 100; hours worked = 2,000.
- Rate variance = (10 − 10.50) × 2,100 = $1,050 adverse.
- Idle time variance = 100 × $10 = $1,000 adverse.
- Efficiency variance = (2,000 − 2,000) × $10 = $0.
- Check: standard cost = 2,000 × $10 = $20,000. Actual cost = 2,100 × $10.50 = $22,050. Total = $2,050 adverse = $1,050 + $1,000 + $0.
Answer: Rate variance $1,050 adverse; idle time variance $1,000 adverse; efficiency variance nil.
Exam tips
- Check whether the question gives hours paid and hours worked. If they differ, idle time is involved.
- Read whether the answer needs the amount only or also F/A. Number entry questions may need the sign or label.
- For cause questions, pick the option that fits the direction. For example, adverse efficiency fits poor training, poor materials or machine problems.
- Use the sum check: the parts must equal the total labour variance. It catches most errors in seconds.
Practice questions from Reconciliation of budgeted and actual profit
- Zeta Ltd budgeted to sell 2,000 units at a standard selling price of $50 per unit. Actual sales were 2,000 units at $52 per unit. What is th…
- Which of the following is the most likely explanation of an adverse material price variance combined with a favourable material usage varian…
- Zeta Ltd's standard labour rate is $12 per hour. In May, 4,500 hours were paid for at a total cost of $56,250, and all hours paid were worke…
- A company replaces skilled workers with cheaper, less experienced staff to reduce wage costs. Which pair of labour variances is most likely …
- Orlin Co budgeted 1,000 units with a standard of 2 hours per unit at $15 per hour. Actual output was 1,100 units, using 2,300 hours paid and…
Labour Rate and Efficiency Variances in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Labour Rate and Efficiency Variances: frequently asked questions
What is the difference between labour rate and labour efficiency variance?
The rate variance measures the effect of paying a different hourly rate than standard. The efficiency variance measures the effect of using more or fewer hours than allowed for the actual output. One is about price, the other about time.
Why is the efficiency variance valued at the standard rate?
Efficiency isolates the effect of hours only. Using the standard rate keeps the price effect out, since that is already in the rate variance.
What causes an adverse labour rate variance?
Common causes are overtime premiums, pay rises not in the standard, and using higher-grade staff than planned. Shortage of labour that forces the use of agency staff is another cause.
Is idle time variance always adverse?
Yes. Idle time is paid time with no output, so it can only add cost against the standard. It is valued at the standard rate.