Question

Penn produces a product that requires 4 standard labor hours at a standard labor rate of $20 per hour. Penn produced 1,000 units of the product and used 3,900 labor hours at $21 per hour which is a labor rate variance of $3,900. Is the labor rate variance for the 1,000 unit production run favorable or unfavorable?

A) Favorable
B) Unfavorable
C) Neutral
D) Cannot be determined

Answer 1

The labor rate variance for Penn's production of 1,000 units, with an actual labor rate of $21 per hour against a standard rate of $20 per hour and resulting in $3,900 more spent, is unfavorable.

Step-by-step explanation:

When assessing the labor rate variance for Penn's production run of 1,000 units, we start by looking at the standard cost versus the actual cost incurred. The company expected to pay $20 per hour for 4 hours per unit, totaling $80 per unit in labor costs. However, they actually paid $21 per hour for labor. The actual total labor cost for producing 1,000 units would then be 3,900 hours times $21 per hour. This results in an actual labor cost of $81,900.

Now, to calculate the expected labor cost for 1,000 units at the standard rate, we would do the following: 1,000 units times 4 hours per unit times $20 per hour, which equals $80,000.

By comparing the actual labor cost ($81,900) to the standard labor cost ($80,000), we find that the company spent $1,900 more than expected, which is exactly equal to the reported labor rate variance. Since they spent more than the standard cost, the labor rate variance is considered unfavorable.