Which statement describes labor rate variance and labor efficiency variance?

Which statement describes labor rate variance and labor efficiency variance?

• A. Rate variance = (Actual wage rate - Standard rate) x Actual hours; Efficiency variance = (Actual hours - Standard hours allowed) x Standard rate.
• B. Efficiency variance = (Actual wage rate - Standard rate) x Actual hours.
• C. Rate variance = (Actual hours - Standard hours) x Actual rate.
• D. Rate variance and efficiency variance are the same.

Answer: (A)

Labor variances split the cost difference into two separate components: rate and efficiency. The rate variance looks at how much extra (or saved) cost comes from paying a wage rate different from the standard rate, regardless of how many hours were worked. It’s calculated as (Actual wage rate − Standard rate) × Actual hours. The efficiency variance measures how many hours were used compared with the standard hours allowed for the actual output, valued at the standard rate, so it’s (Actual hours − Standard hours allowed) × Standard rate. The statement given matches these definitions exactly, making it the best description. The other formulations mix up the concepts: efficiency variance should use hours difference (not wage rate differences), and rate variance should use differences in rates (not hours). Also, rate variance and efficiency variance are not the same thing—they capture different drivers of cost. Signs matter too: higher actual rates lead to unfavorable rate variance, and using more hours than allowed leads to unfavorable efficiency variance.

Labor variances split the cost difference into two separate components: rate and efficiency. The rate variance looks at how much extra (or saved) cost comes from paying a wage rate different from the standard rate, regardless of how many hours were worked. It’s calculated as (Actual wage rate − Standard rate) × Actual hours. The efficiency variance measures how many hours were used compared with the standard hours allowed for the actual output, valued at the standard rate, so it’s (Actual hours − Standard hours allowed) × Standard rate. The statement given matches these definitions exactly, making it the best description.

The other formulations mix up the concepts: efficiency variance should use hours difference (not wage rate differences), and rate variance should use differences in rates (not hours). Also, rate variance and efficiency variance are not the same thing—they capture different drivers of cost. Signs matter too: higher actual rates lead to unfavorable rate variance, and using more hours than allowed leads to unfavorable efficiency variance.