Do all variances result in an increase in labor cost?

• A. No; a variance could be due to fewer hours worked or could be offset by greater-than-expected sales volume.
• B. Yes; this is why any variance must be closely monitored and must not be allowed to occur.
• C. No; if the employee agrees to be paid in cash 'under the table,' the need for benefits and tax deductions is eliminated.
• D. Yes; a variance could be due to overtime policies.

Answer: (A)

Labor cost variances measure the difference between what was actually spent on labor and what should have been spent according to standards for the actual level of output. They can be favorable or unfavorable; they don’t automatically mean higher costs.

This is best understood by recognizing that spending can be lower than planned if workers log fewer hours than the standard requires, which reduces the total labor cost and creates a favorable variance. Also, the overall financial picture can be affected by other factors, such as sales volume, but that doesn’t invalidate the idea that a variance in labor cost isn’t necessarily an increase.

So, not all variances raise labor costs—they can arise from using fewer hours or other drivers that reduce spending.