Question

Gable Company annually hires inexperienced college students at minimum wage to help the Production Department fill Christmas orders. If standard costs are not adjusted to reflect this practice, this situation is most likely to result in: An unfavorable labor price variance as well as an unfavorable labor efficiency variance. An unfavorable labor price variance but a favorable labor efficiency variance. O A favorable labor price variance as well as a favorable labor efficiency variance. O A favorable labor price variance but an unfavorable labor efficiency variance.

Answer 1

A favourable labour price variance and unfavourable labour efficiency variance

This is so because when unskilled labours are there, actual hours increases and wage rate decreases.

Now Labour Price Variance = Actual Hours x (Standard Rate - Actual Rate)

Here, rate difference is considered and as the rates are reduced Variance is favourable.

But for Labour Efficiency Variance = (Standard Hours - Actual Hours) x Standard Rate

Here, labour hours difference is considered and as the hours taken are more,

Labour Efficiency Variance is Unfavourable.

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