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The actual rate is $9.50 per hour against a standard of $10.00, and 5,100 hours are actually worked. What is the direct labour rate variance?
A$2,500 favourable
B$2,550 favourable
C$2,550 unfavourable
D$1,550 favourable
Answer & Solution
Correct answer: B. $2,550 favourable
1. The rate variance is actual rate minus standard rate, multiplied by the actual hours.
2. Actual rate minus standard rate is $9.50 minus $10.00, which is negative $0.50.
3. Negative $0.50 times 5,100 hours gives negative $2,550.
4. A negative result means less was paid per hour than planned, so the variance is favourable.
5. The rate variance always uses the actual hours, so using the 5,000 standard hours would wrongly give $2,500.
6. $1,550 is the net of the time and rate elements rather than the rate element alone.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 8.3 Direct Labor Cost Variance_
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