 CPA questions that deals with variances. This topic is covered on the BEC section of the CPA exam as well as in your cost accounting and managerial accounting. Many students taking the CPA exam will find challenges with variances and the reason is simple. They either did not learn that topic in college properly or they learned it a long time ago. And on the CPA exam variances are tricky. You have favorable, unfavorable. You have labor. You have material. You have efficiency and you have rate. You have quantity and you have price. So to understand all of those, I strongly suggest you go to my website farhatlectures.com where I teach you the material from scratch. I don't replace your CPA review course. I am an alternative or backup explanation. I am a useful addition to your CPA review course. Your risk to try me is one month. You try me. You like it. You keep it. If not, you cancel. Your potential gain is passing the exam. Also if not for anything, take a look at my website to find out how well your university is doing on the CPA exam. I do have resources for other college, for other courses. Also connect with me on LinkedIn if you haven't done so, like this recording. Connect with me on Instagram, Facebook, Reddit, and Twitter. So let's take a look at these questions. The first thing you want to do is when you see a lot of numbers and data, read the question first. And the reason is they could be asking you different questions about this data. So you don't want to waste your time investing in information that you don't really need. So let's take a look at the first question. The question asks, what's the direct labor rate or price variance for April? So it's labor and it's price or rate. So now I know what I'm looking for. Let's see what's giving in the problem. Adam manufactures heavy equipment and uses a standard cost system. I hope you know what a standard cost system. Otherwise, you will not know what variances are if you don't know what the standard cost system is. The following information is available for the month of April. 80,000 direct labor hours were budgeted. A total of 84,000 direct labor hours were worked at a total cost of 840,000. The standard direct labor rate is $9. The standard direct labor time per unit is four hours. So one unit for each unit we need four hours. So the question is what's the direct labor price or labor or rate variance? Well, how do we figure out whether it's favorable or unfavorable? Well, the first thing is what is the standard? The standard rate the standard rate is $9. This is the standard. What was the actual rate? What is the actual rate? Well, we don't know what the actual rate is unless we look at how much did they actually incur. They spent $840,000. That's how much they spent and they worked 84,000 hours. Well, this means it costs them actually $10 per hour. So the actual rate is $10. Now immediately, once you know the actual rate is $10 and the standard is $9, you can eliminate any favorable answer because you know that they paid more. They paid $1 more per hour. They wanted to pay $9 based on their standard costing. They end up paying $10. Now why did they pay $10? Could be many reasons. They did not find enough employees. They had to hire employees at a higher rate. It could be many reasons. They have a union. They raised the hourly rate on them. It doesn't matter. But the point is they incurred more. $10 per hour. $1 more and now it's favorable or unfavorable. We know it's unfavorable. Now it's easy to guess 50-50. Now the other thing is how do you compute the unfavorable? Do you use is it $79,000 or $84,000? Well, they worked actually 84,000 hours. Therefore, the unfavorable price variance for the labor is 84,000. Therefore, from a price perspective, they paid $84,000 more to do the job. And the reason is they paid $1 extra per hour. Then they thought that they will pay. So this is the first question. The second question is what's the direct labor efficiency variance for April? Efficiency means quantity. Did they spend more hours or less hours on this job? Well, I mean, if you really think about it quickly, they budgeted $80,000 and they work $84,000. So I would say it's going to be unfavorable. So immediately you eliminate B, you eliminate D because it seems they were unfavorable. So notice now you're down to 50-50. And if you really think about it, sometimes they may not give you the information directly, but you have to be very, very careful. And here what they said, Adam planned on producing 25, but they produced only 20,000. So if you think about it, if they produced 20,000, it should cost them each unit. It should cost four hours. It should cost them 80,000 hours. So notice the information is given to you twice. It's given to you here, one unit per direct labor hour, and here they're telling you that 80 direct labor hour were budgeted, but the actual was 84,000 hours. They actually spent 84,000. Therefore, they spent an additional 4,000 hours. It seems this company is not doing good. They paid more per hour for their employees, and their employees spent more time than what they expected. Now, it's 4,000 hours. What do we multiply this 4,000 hours by? 4,000 extra hours. You multiply it by the standard rate of $9. Therefore, your efficiency variance is unfavorable, 36,000. So simply put, this company, they will need to review everything that they're doing. The rate, they're paying a little bit more than they thought they will, and they spent more time. Now, the question could be, what is the total labor variance? The total labor variance is unfavorable, and you add both of them. So the question could be, what's the total labor variance? It could be both, but we break it down into price variance and efficiency variance. We break it down into price and efficiency, but the total is together both. So you have to understand how these variances work. On farhatlectures.com, I explained this topic in details. I used the three column method to explain how to answer any question you have, because you have labor, you have material, you have overhead and overhead, you have fixed overhead, you have variable overhead. So you could be responsible for eight different variances. So that's why it's very important to understand this topic. Otherwise, on the CPA exam, they will give you those questions, and they will trip you, and you will fail the exam. Farhatlectures.com, don't replace your CPA review course. I offer you an alternative, a backup explanation. I can be a useful addition. Try me for a month. That's your risk. Good luck. Stay safe, and study hard.