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)

CAUSES OF WAGES (LABOUR) RATE VARIANCE

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
  • Employment of one or more workers of a different grade than the standard grade
  • Payment of guaranteed wages to workers who are unable to earn their normal wages if such guaranteed wages form part of direct labour cost
  • New workers not being allowed full normal wage rates.
  • Use of the different method of payment i.e. payment of day rates while standards are based on piece work method of remuneration
  • Higher wages paid on account of overtime for urgent work
  • 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

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

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