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Answer (D) is correct . Since 160 cars were serviced and each car requires 1/4 of an hour to service, the “expected” quantity of hours, that is, the quantity that should have been expended given the achieved level of production, was 40 (160 × .25). The actual number of hours expended can be found by substituting in the formula for the efficiency variance: ? (EQ – AQ) × SP = Labor efficiency variance (40 – AQ) × $7.00 = $14 F 40 – AQ = 2 AQ = 38 Substituting again allows us to derive the actual wage rate paid: AQ × (SP – AP) = Labor rate variance 38 × ($7.00 – AP) = $19 U ($7.00 – AP) = .5 AP = $7.50

Answer (A) is incorrect because Forty-two hours results from reversing the sign of the efficiency variance, and $6.55 results from reversing the sign of the rate variance.
Answer (B) is incorrect because Treating the rate variance as if it were the efficiency variance and vice versa results in $6.67 and 42.71.
Answer (C) is incorrect because Forty-two hours results from reversing the sign of the efficiency variance.