A rate variance is the difference between the actual price paid for something and the expected price, multiplied by the actual quantity purchased. The concept is used to track down instances in which a business is overpaying for goods, services, or labor. However, excessive attention to rate variances can have the negative effect of only focusing on cost reductions. Instead, it can make more sense to pay somewhat more for higher quality, which tends to reduce the total amount of expenses incurred. The formula is:
(Actual price - Standard price) x Actual quantity = Rate variance
The "rate" variance designation is most commonly applied to the labor rate variance, which involves the cost of direct labor in comparison to the standard cost of direct labor.
The "rate" variance uses a different designation when applied to the purchase of materials, and may be called the purchase price variance or the material price variance.