When is the labor rate variance favorable?

Question

BlackTom AI · Accepted Answer

Labor rate variance equals (Actual Rate − Standard Rate) × Actual Hours, so it's favorable when the actual price is less than the standard price.

1. Relevant knowledge points and concepts
- Labor rate variance (LRV) measures the difference between what was actually paid per labor hour and the standard (expected) labor rate, applied to the actual hours worked.
- Formula: LRV = (Actual Rate − Standard Rate) × Actual Hours.
- A negative LRV (actual rate lower than standard) is labeled "favorable" because the firm paid less than planned; a positive LRV is "unfavorable."

2. Step-by-step reasoning
- Start with the formula and identify the sign: if Actual Rate < Standard Rate, then (Actual Rate − Standard Rate) is negative.
- Multiply that negative difference by Actual Hours (a positive number) yields a negative total variance.
- Accounting convention: negative cost variances for rate/price are favorable.

3. Calculations with intermediate steps (numeric example)
- Assume Standard Rate (SR) = $10.00/hour, Actual Rate (AR) = $9.00/hour, Actual Hours (AH) = 100 hours.
- Compute difference: AR − SR = $9.00 − $10.00 = −$1.00 per hour.
- Multiply by hours: LRV = (−$1.00) × 100 = −$100.
- Interpretation: $100 favorable labor rate variance (company paid $100 less than standard).

4. Why the correct answer is correct
- The phrase "actual price" refers to the wage (rate) actually paid per hour. When that actual rate is less than the standard/expected rate, the computed variance is negative, which the company reports as favorable because costs were lower than standard.

5. Why other possibilities are incorrect
- If Actual Rate > Standard Rate, LRV is positive and therefore unfavorable (company paid more than standard).
- If Actual Rate = Standard Rate, LRV is zero (no variance).
- Changes in hours (efficiency) affect the labor efficiency variance, not the labor rate variance.

6. Conclusion
- Therefore, the labor rate variance is favorable when the actual price is less than the standard price, which matches the provided answer.

When is the labor rate variance favorable?单项选择题

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