The formulas
- Rate variance = (actual rate - standard rate) x actual hours
- Efficiency variance = (actual hours - standard hours allowed) x standard rate
- Total = actual cost - standard cost allowed
How it works
The rate variance isolates the effect of paying a different wage than standard, for instance from overtime or a different skill mix. The efficiency variance isolates working more or fewer hours than the standard allows for the output.
As a payroll analytic, a large rate variance can point to unapproved rate changes, and a large efficiency variance can point to idle time or standards that are out of date. Both are leads for inquiry and are not proof of error.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
What are standard hours allowed?
Standard hours per unit times actual units produced.
Why can both variances be unfavorable?
Paying more per hour and using more hours can happen together, for example heavy overtime.
Are the variances additive?
Yes. They add to the total difference between actual and standard cost.
Formulas on this page are the standard definitions.
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