Direct labor rate variance is unfavorable when which condition holds true?

• A. AR is greater than SR
• B. AR is less than SR
• C. AH is greater than SH
• D. AH is less than SH

Answer: (A)

Direct labor rate variance measures the difference between what was actually paid per hour and what should have been paid per hour, for the actual hours worked. It is calculated as (AR − SR) × AH. It becomes unfavorable when the actual rate per hour is higher than the standard rate per hour, because paying more per hour increases total labor cost. For example, with a standard rate of 20 per hour and an actual rate of 22 per hour for 100 hours, the variance is (22 − 20) × 100 = 200, unfavorable. If AR were lower than SR, the variance would be favorable, and if AR equals SR, it would be zero. The other options relate to hours and efficiency, not the rate itself.