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ACCA Applied Knowledge · Management Accounting · Variance calculations and analysis

Elmwood Co has a standard labour rate of $8 per hour. In a period, 4,000 hours were paid but only 3,600 hours were worked because of an equipment breakdown, with the idle time not budgeted. Total wages paid were $34,400. Standard hours for actual output were 3,500. What is the labour rate variance, calculated on hours paid?

The labour rate variance is $2,400 adverse. The rate variance is based on hours paid: 4,000 hours at the $8 standard would cost $32,000, but actual wages were $34,400. The idle time of 400 hours is a separate variance and does not alter this calculation.

  1. A$2,400 adverseCorrect
  2. B$400 adverse
  3. C$3,200 adverse
  4. D$2,400 favourable

Explanation

Hours paid at standard rate: 4,000 x $8 = $32,000. Actual cost $34,400, so rate variance = $2,400 adverse. $400 would wrongly use hours worked (3,600 x $8 = $28,800 gives $5,600, not $400), and $3,200 is the idle time variance (400 x $8).

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