How do you calculate labour rate variance and labour efficiency variance?

• A. Rate variance = actual hours × (actual rate − standard rate); Efficiency variance = (standard hours − actual hours) × standard rate.
• B. Rate variance = actual hours × (standard rate − actual rate); Efficiency variance = (actual hours − standard hours) × standard rate.
• C. Rate variance = (actual hours − standard hours) × (standard rate); Efficiency variance = actual hours × (standard rate − actual rate).
• D. Rate variance = actual hours × actual rate; Efficiency variance = standard hours × standard rate.

Answer: (B)

Labour variances split cost impact into two independent pieces: the rate you pay per hour and the number of hours used. The rate variance captures how much cost changes because the actual hourly rate differs from the standard rate, while the efficiency variance captures how many hours were actually used versus the standard hours allowed for the output, valued at the standard rate.

Use these forms:

• Rate variance = actual hours × (standard rate − actual rate). This shows the impact of paying a lower or higher rate per hour than planned; a positive value indicates a cost saving on rate (actual rate is lower than standard), and a negative value indicates extra cost (actual rate higher than standard).

• Efficiency variance = (actual hours − standard hours) × standard rate. If more hours are used than standard, this is unfavorable (positive); if fewer hours are used, it’s favorable (negative).

The given correct approach aligns with these definitions, separating the effect of paying the right rate from the effect of using the right amount of time. Other forms mix the signs or swap the roles of hours and rates, which does not match the standard way to decompose labour cost variances.