Final answer:
The labor rate variance calculation indeed involves actual direct labor hours used in production, which is true. It helps management analyze labor costs and make adjustments to labor management in response to factors like union wage demands, which can lead to a shift towards more capital-intensive production methods.
Step-by-step explanation:
The calculation of labor rate variance does indeed involve the actual direct labor hours used in production. This is true because the labor rate variance specifically compares the actual labor cost incurred during production to the standard cost that should have been incurred given the actual number of hours worked. Variance analysis helps management understand deviations in labor costs, allowing them to make informed decisions regarding labor management and cost control.
In scenarios where higher wages are being negotiated, such as when unions demand increased pay rates, companies may adjust their labor-to-capital ratio. For example, if a firm shifts from a plan requiring many hours of labor to one that uses more machinery, fewer hours of labor will be required. This can lead to a different formulation of labor rate variance, as the actual hours of labor will potentially decrease, and the planned vs. actual cost per hour may change.
The implications of increasing wages are illustrated by a firm's choice to use different combinations of labor and equipment in producing a home exercise cycle. Such changes can urge a company to invest more in physical capital equipment, thereby affecting the labor hours demanded. High wages can cause a firm to prefer more capital-intensive production, increasing labor productivity but potentially reducing the total number of workers needed.