A Tale of Two Hotels and One Elephant in the Room: An Analysis of Variable Labor Variance

One topic that is always on the minds of hoteliers, restaurateurs, and hospitality business owners is that one elephant in the room – labor! From quiet quitting to inexperienced staff, from minimum wage increase to tipped employees, the list of labor related issues seems to have no end. Labor is the highest cost item in the hospitality business because we ARE a people business.

Yes, there are computer systems. Yes, there are service robots. Yes, there is artificial intelligence. Yet, at the end, hospitality is about that warm welcome and smile when guests walk through our doors, the customer service, the attention to detail, the professionalism, all to create that memorable experience so they will return and stay and dine with us once again.

Working with people is not the same as working with machines. When employees have a good and supportive work environment, a fair and caring leader, a reasonable wage, with positive team spirit, their efficiency also increases. In analyzing Variable Labor Variance, we have four different parts:

It looks a bit complicated, but these labor rate variance formulas can be set in Excel easily. Once set, you can simply change out the numbers and view the result for different scenarios. So, let’s begin our tale of two hotels and visit the elephant of labor in the room. Hotel A is doing well. It is experiencing a healthy demand for its rooms, and it has a solid housekeeping staff. The hotel is budgeted to sell 400 room nights, but it exceeds its budget and sold 430 rooms. With more rooms to clean, the labor cost should go up. But it ended up $88.33 less as a favorable labor variance. How did that happen?

Let’s first figure out the Allowable Time for Actual Output (ATAO). Using the standard as seen in the budgeted line of 30 minutes to clean a room, if the hotel sells 430 rooms, its ATAO will be 215 hours.

And the four variances are calculated as follows:

So, how is Hotel A able to enjoy a lower labor cost even when they sold 30 more rooms? Indeed, the 30 extra room (volume) increased the labor cost by $270 and since this is a cost, any increase is deemed unfavorable.

However, a few things happened in Hotel A. The rate was $17.50 rather than $18.00. Is this because more of the housekeepers at a lower rate labor were scheduled rather than the higher paying staff? Is that because there is some schedule change between employees? That will be an interesting fact to look into. This favorable labor rate variance saves the hotel $100.

More importantly, the crew is more efficient! Instead of using the standard of 30 minutes to clean a room, they are able to perform their tasks more effectively and efficiently and only used 200.67 hours! This efficiency variance saves the hotel another $258. Another favorable variance.

Finally, recall that for interaction variance, when one difference in positive and one is negative (in this case the time is negative as Hotel A uses more hours, but the rate is positive as the hourly pay was less), the variable is considered favorable. So, adding the $0.33 of rate-time variance, the total variable labor variable is a favorable number of $88.33.

Hotel A should congratulate its housekeeping staff for a job well done, and motivate them to keep up the exceptional performance. Again, money is saved, but from where and how are just as important!

Now, let’s continue with our tale and take a look at Hotel B. It has budgeted to sell 440 room nights, but was only able to sell 410. If a hotel sells less rooms, it housekeeping labor should be less. But in this case, Hotel B experienced an unfavorable variance of $42.63. Another mystery on our hands!

Well, a quick look at the four components that make up the variable labor variance makes things a lot clearer. Again, let’s start the analysis by first calculating the Allowable Time for Actual Output (ATAO). Using the standard as seen in the budget line of 30 minutes to clean a room, if the hotel sells 410 rooms, its ATAO will be 205 hours.

And the four variances are calculated as follows:

Selling less rooms but having a higher labor cost is not a good situation. So, let’s see if we can unpack this by taking a deeper dive. By selling 30 less room, the volume variance is favorable at $270 as the hotel should not be using as much labor.

The hotel is also able to save a bit in the hourly wage rate, paying $17.75 per hour rather than $18, netting a favorable variance of $55.

However, the efficiency variance is a pretty high number at $369 negative or unfavorable. Instead of using the standard of 30 minutes to clean a room, the average time used were 33 minutes. It may not seem much but 3 minutes for each of the 430 rooms sold contributes to a negative or unfavorable variance of $369. And the $1.38 of rate-time variance did not help much in this quandary. When adding all the favorable and unfavorable variances, we are still $42.63 short.

Now it is time for Hotel B to investigate why it took the staff longer to clean each room and find the root cause. Is it because they are new and are not trained well? Is it due to some equipment failure such as the vacuum cleaners are not working properly? Yes, it can be due to morale and other issues. This is where you, the managers and owners, do your golden magic, find out the issues at end and take corrective actions.

The elephant will always be there, as people are the heart of our industry. But we can sure talk about it, understand the facts, check with our staff, listen, observe, and take proper actions to keep our operations running smoothly.

More detailed information and other examples of variable labor variance can be found in Chapter 10 Operations Budgeting in Hospitality Industry Managerial Accounting.

By Agnes L. DeFranco, Ed.D., CHAE, CHIA, CAHTA, CHE, Professor and Conrad N. Hilton Distinguished Chair, AHLEI Co-Author of the Ninth Edition of Hospitality Industry Managerial Accounting.