ACCA Performance Management (F5) Certification Practice Exam

Which formula is used to calculate total labor variance?

1. AH x AR

2. AH x SR

3. SH x SR

4. SH x AR

The correct answer is: AH x AR

The total labor variance is calculated using the formula AQ x AP (actual quantity of labor hours multiplied by actual pay rate). However, in the context of the options provided, the correct choice for calculating total labor variance can be indirectly related with the alternative expression for decomposing total labor variance into its components. The option that is correct reflects the relationship between actual labor hours (AH) and the actual rate (AR). The total labor variance can be broken down into two parts: the rate variance and the efficiency variance. When using actual hours worked multiplied by actual rate gives you a safe way to measure costs incurred, and helps determine whether the labor cost was over or under the budget. Therefore, the formula using actual hours (AH) multiplied by actual rate (AR) represents the total actual cost of labor incurred, and is fundamental for assessing labor performance compared to expectations. Other choices indicate different elements of labor variance but either represent costs based on standard rates or standard hours, which do not directly yield the total actual variance itself but serve to calculate different components of labor costs. Thus, the association with actual numbers (AH and AR) is crucial for capturing the true variance in total labor expenses.