Price or rate variance can apply to which input categories?

• A. Materials and labour
• B. Overheads only
• C. Only materials
• D. Only labour

Answer: (A)

Price or rate variance arises when what you actually pay per unit of input differs from what you planned to pay, multiplied by the amount actually used or purchased. This concept naturally fits inputs where the price per unit is clear and controllable: materials, where you buy a quantity at a price per unit, and labour, where you are paid a wage rate per hour. If the actual price or rate is higher than the standard, you get an adverse variance; if lower, a favourable variance.

Overheads are tracked differently in standard costing, usually via expenditure or volume variances rather than a direct price/rate variance per unit. So the variance most appropriate to capture price deviations is tied to materials and labour, not overheads alone.

For example, if the standard price for materials is $5 per unit and you actually pay $5.50 for 1,000 units, the price variance is $500 adverse. If the standard labour rate is $15 per hour and you actually pay $16 for 800 hours, the labour rate variance is $800 adverse. This illustrates why materials and labour are the input categories where price or rate variance applies.