The Mystery of Direct Labor Price Variance Revealed
What is the direct labor price variance?
The direct labor price variance is $1,840. Option B.
Understanding Direct Labor Price Variance
The Standard Rate and Actual Rate:In this scenario, the standard rate of pay per direct labor hour is $23. However, the actual rate calculated based on the direct labor payroll and hours worked is $22.60 per direct labor hour. This $0.40 difference between the standard rate and actual rate is the key to determining the direct labor price variance.
Calculating the Direct Labor Price Variance:The formula to calculate the direct labor price variance is (Standard Rate - Actual Rate) x Actual Hours worked. In this case, we substitute the values to find:
( $23 - $22.60 ) x 4,600 = $0.40 x 4,600 = $1,840
Interpreting the Result:Since the calculated direct labor price variance is $1,840, it means that the actual direct labor cost is $1,840 less than what was expected based on the standard rate. This is known as a favorable variance because it indicates a cost savings in direct labor expenses.