As with all future predictions, labor rate predictions can have inaccuracies. If the standard labor rate was set using these predicted numbers, it may cause a labor rate variance.
The labor price or rate variance is calculated as: (Actual Rate ? Standard Rate) × Actual Hours. The only figure union contracts can influence is the actual labor rate. The standard rate is set by the budget at the beginning of the year. As union contracts are approved before the budgeting cycle begins, the information about potential changes in wages and salaries is already included in the budget and standards. Therefore, a union contract approved before the budgeting cycle cannot be the cause of a labor rate variance.
The assignment of different skill levels of workers than was planned in most cases will cause a labor price variances. The labor rate variance is calculated as: (Actual Rate ? Standard Rate) × Actual Hours. When there is a difference between the rates of assigned (with lower or higher working skills) and planned workers, a labor rate variance will most likely occur.
If the standard labor rate was set using a single average standard rate, it may cause a labor rate variance. If the rate doesn't reflect the proportion of hours worked of each wage rate group of workers, a variance will result.
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