A favorable labor rate variance indicates that
A. Actual hours exceed standard hours
B. Standard hours exceed actual hours
C. The actual rate exceeds the standard rate
D. The standard rate exceeds the actual rate
The Correct Answer And Explanation is:
Correct Answer: D. The standard rate exceeds the actual rate
Explanation:
A labor rate variance is a component of direct labor cost variance analysis, commonly used in managerial accounting to evaluate performance. It measures the difference between the actual hourly wage rate paid to workers and the standard hourly wage rate that was expected or budgeted, multiplied by the actual hours worked.
The formula for labor rate variance is: Labor Rate Variance=(Standard Rate−Actual Rate)×Actual Hours\text{Labor Rate Variance} = (\text{Standard Rate} – \text{Actual Rate}) \times \text{Actual Hours}
A favorable labor rate variance occurs when the actual rate paid to workers is less than the standard rate. In other words, the company expected to pay more per hour for labor than it actually did. This is considered “favorable” because it results in cost savings for the company.
Let’s apply this to the given options:
- A. Actual hours exceed standard hours:
This relates to a labor efficiency variance, not the rate variance. - B. Standard hours exceed actual hours:
This also relates to labor efficiency, indicating workers were more productive, but not necessarily cheaper. - C. The actual rate exceeds the standard rate:
This would be an unfavorable labor rate variance because the company is paying more than expected per hour. - D. The standard rate exceeds the actual rate: ✅
This means the company paid less per hour than anticipated. For example, if the standard rate was $20/hour and the actual rate paid was $18/hour, the company saved $2/hour per worker. Multiplied over hundreds or thousands of labor hours, this represents a favorable cost variance.
Summary:
Option D is correct because a favorable labor rate variance happens when the actual hourly wage is lower than the standard hourly wage, thus reducing labor costs and contributing positively to the company’s profitability.