Management Accounting · Variance calculations and analysis

Labour Rate and Efficiency Variances: Formulas and Method

Updated 11 October 2026 · Fact-checked

The labour rate variance compares the actual cost of hours paid with those hours at the standard rate. The labour efficiency variance compares actual hours worked with the standard hours for actual output, valued at the standard rate. A positive result is favourable (F); a negative result is adverse (A).

Understand Labour Rate and Efficiency Variances

A standard cost card says how much labour one unit should cost. It gives the standard hours per unit and the standard rate per hour. At the end of a period, actual labour cost almost never equals standard labour cost. Variances explain the gap.

The total gap splits into two parts. The labour rate variance is about price: did you pay more or less per hour than planned? The labour efficiency variance is about quantity: did the workers take more or fewer hours than they should have for the output made?

The efficiency variance always uses the standard rate. This keeps the two variances separate. Price effects sit in the rate variance. Time effects sit in the efficiency variance.

In the Applied Knowledge exam, you must work out the numbers and also give a likely cause. An adverse rate variance could come from overtime premiums or using higher-grade staff. An adverse efficiency variance could come from poor training, poor materials or machine breakdowns. Causes are often linked. Using cheaper, less skilled workers may give a favourable rate variance and an adverse efficiency variance.

If there is idle time, the syllabus treats it as a separate variance. In that case the efficiency variance uses hours actually worked, and the rate variance uses hours paid. Read the question to see which hours are given.

Key formulas to remember

Labour rate variance: (Actual hours paid × standard rate) − (Actual hours paid × actual rate); Same as actual hours paid × (standard rate − actual rate). Positive is favourable, negative is adverse.
Labour efficiency variance: (Standard hours for actual output − actual hours worked) × standard rate; Positive is favourable (fewer hours used), negative is adverse.
Standard hours for actual output: Actual units produced × standard hours per unit; Always based on actual output, not budgeted output.
Total labour cost variance: (Standard hours for actual output × standard rate) − actual labour cost; Equals the rate variance plus the efficiency variance when there is no idle time.

How to solve Labour Rate and Efficiency Variances questions

Use the same sequence for every labour variance question. It stops you mixing up rates and hours.

1List the data: actual output, standard hours per unit, standard rate, actual hours paid, actual hours worked and actual cost.
2Calculate standard hours for actual output: actual units × standard hours per unit.
3For the rate variance, work out what the actual hours paid should have cost at the standard rate.
4Subtract the actual cost paid. A positive answer is F, a negative answer is A.
5For the efficiency variance, subtract actual hours worked from standard hours for actual output.
6Multiply the hours difference by the standard rate. Positive is F, negative is A.
7Check: if there is no idle time, rate plus efficiency should equal the total labour cost variance.
8Answer what the question asks: the value, the F or A label, or the likely cause.

Quickest way: Rate and efficiency in two lines

When to use it: Use this for number entry or multiple choice questions when time is short and the data is clean.

Rate: actual hours × (standard rate − actual rate). If you are given total actual cost, compute actual hours × standard rate minus actual cost.
Efficiency: (standard hours for actual output − actual hours) × standard rate.
Label the sign at once: you used or paid less than standard means F, more means A.
Quickly check the answer against the options. Wrong options are often the result of using the actual rate or budgeted output.

Common mistakes in Labour Rate and Efficiency Variances

Valuing the efficiency variance at the actual rate.
Students value everything at the actual rate by habit.
Fix: Efficiency is a quantity variance. Always use the standard rate.
Using budgeted output to find standard hours.
Budget figures are often given in the question and look relevant.
Fix: Use actual units produced × standard hours per unit.
Getting the sign wrong.
Students subtract in the wrong order.
Fix: Think first: more cost or more hours than standard is adverse. Then set the sign to match.
Using hours worked in the rate variance when idle time exists.
The two hour figures get mixed up.
Fix: Rate uses hours paid. Efficiency uses hours worked. The difference is idle time.
Treating every adverse variance as poor management.
Students only look at the sign.
Fix: Give a reason and consider links, such as cheaper labour causing lower efficiency, or a pay rise that was outside the manager's control.

Worked examples

Example 1

A product has a standard labour time of 3 hours at $12 per hour. In May, 1,000 units were made. Workers were paid for 3,200 hours, all worked, at a total cost of $40,000. Calculate the labour rate and efficiency variances.

Show the solution

Standard hours for actual output = 1,000 × 3 = 3,000 hours.
Rate: 3,200 hours at the standard rate should cost 3,200 × $12 = $38,400.
Actual cost is $40,000. Rate variance = $38,400 − $40,000 = $1,600 adverse.
Efficiency: (3,000 − 3,200) × $12 = −200 × $12 = $2,400 adverse.
Check: standard cost 3,000 × $12 = $36,000. Total variance = $36,000 − $40,000 = $4,000 adverse. $1,600 + $2,400 = $4,000.

Answer: Labour rate variance $1,600 adverse; labour efficiency variance $2,400 adverse.

Example 2

A company makes 500 units. Each unit has a standard time of 4 hours at $9 per hour. Actual hours worked and paid were 1,900, at an actual cost of $16,150. Calculate both variances and give one possible link between them.

Show the solution

Standard hours for actual output = 500 × 4 = 2,000 hours.
Rate: 1,900 × $9 = $17,100 at the standard rate.
Actual cost is $16,150. Rate variance = $17,100 − $16,150 = $950 favourable.
Efficiency: (2,000 − 1,900) × $9 = 100 × $9 = $900 favourable.
Check: standard cost 2,000 × $9 = $18,000. Total variance = $18,000 − $16,150 = $1,850 favourable. $950 + $900 = $1,850.
Link: both are favourable, which could suggest a more skilled team paid less than expected, though this would need checking.

Answer: Labour rate variance $950 favourable; labour efficiency variance $900 favourable.

Exam tips

Write down standard hours for actual output first. Almost every labour variance depends on it.
In multiple response questions about causes, match each cause to price (rate) or time (efficiency) before choosing.
Look for idle time wording. If it appears, separate hours paid from hours worked.
For number entry, check whether the answer needs a sign, a label such as F or A, or rounding as instructed.
Use the total labour cost check when you have spare time. It catches most arithmetic slips.

Practice questions from Variance calculations and analysis

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 price paid per hour against standard. The efficiency variance measures the hours used against the standard hours allowed for the output made. One is about cost per hour, the other about time taken.

Why is the labour efficiency variance valued at the standard rate?

It isolates the effect of time. If you used the actual rate, the price difference would be counted twice, once in the rate variance and again in efficiency.

Can the rate variance be favourable and the efficiency variance adverse?

Yes. Paying lower-grade workers less can give a favourable rate variance. If they work more slowly, the efficiency variance becomes adverse.

What changes if there is idle time?

The rate variance uses hours paid. The efficiency variance uses hours actually worked. The cost of paid but unworked hours is shown in a separate idle time variance.