Accounting SmartBook Practice Test

Direct labor variance shows how much actual labor cost differs from the standard cost allowed for the actual output, and it can be broken into rate and efficiency variances.

Standard hours for actual output = 35,000 units × 1 hour = 35,000 hours. Standard cost = 35,000 × $10 = $350,000. Actual cost = $374,400 for 36,000 hours.

Total direct labor variance = 374,400 − 350,000 = $24,400 (unfavorable).

Decomposing:

- Rate variance = (Actual rate − Standard rate) × Actual hours = (374,400/36,000 − 10) × 36,000 = $14,400 (unfavorable).

- Efficiency variance = (Actual hours − Standard hours) × Standard rate = (36,000 − 35,000) × $10 = $10,000 (unfavorable).

The sum of rate and efficiency variances equals the total direct labor variance: 14,400 + 10,000 = 24,400 unfavorable.