Question

A bakery finds that the labor efficiency (quantity) variance for rye bread is unfavorable in the month of December. Which of the following could have caused this variance to be unfavorable?  (Check all that apply.)

Group of answer choices

The actual average labor wage per hour was higher than budgeted

The workers spent more time on each loaf of bread than budgeted

More loaves of bread were produced than budgeted

The actual average labor wage per hour was lower than budgeted

The workers spent less time on each loaf of bread than budgeted

Fewer loaves of bread were produced than budgeted

Answer 1

ANS:

The actual average labor wage per hour was higher than budgeted:

Direct Labor Rate Variance is the measure of difference between the actual cost of direct labor and the standard cost of direct labor utilized during a period.

Analysis

A favorable labor rate variance suggests cost efficient employment of direct labor by the organization.

Reasons for a favorable labor rate variance may include:

• Hiring of more un-skilled or semi-skilled labor (this may adversely impact labor efficiency variance)
• Decrease in the overall wage rates in the market due to an increase in the supply of labor which may be caused, for example, due to the influx of immigrants as a result of the relaxation of immigration policy
• Inappropriately high setting of the standard cost of direct labor which may, in the hindsight, be attributed to inaccurate planning

An adverse labor rate variance indicates higher labor costs incurred during a period compared with the standard.

Causes for adverse labor rate variance may include:

• Increase in the national minimum wage rate
• Hiring of more skilled labor than anticipated in the standard (this should be reflected in a favorable labor efficiency variance)
• Inefficient hiring by the HR department
• Effective negotiations by labor unions

The workers spent more time on each loaf of bread than budgeted:

Labor Idle Time Variance is the cost of the standby time of direct labor which could not be utilized in the production due to reasons including mechanical failure of equipment, industrial disputes and lack of orders.

Formula

Direct Labor Idle Time Variance:

Idle Time Variance:

=

Number of idle hours x Standard labor rate

Explanation

Idle time variance illustrates the adverse impact on the profitability of an organization as a result of having paid for the labor time which did not result in any production. Idle time variance is therefore always described as an 'adverse' variance. As with the labor efficiency variance, the calculation of idle time variance is based on the standard rate since the variance between actual and standard labor rate is separately accounted for in the labor rate variance.

Analysis

Reasons for idle time may include:

• Disruption of production activities due to mechanical failures
• Lack of purchase orders especially in case of seasonal businesses
• Industrial disputes

More loaves of bread were produced than budgeted:

Direct Material Price Variance is the difference between the actual cost of direct material and the standard cost of quantity purchased or consumed.

Formula

Formula

Direct Material Price Variance:

=	Actual Quantity x Actual Price	-	Actual Quantity x Standard Price
=	Actual cost	-	Standard Cost

Where:

• Actual Quantity is the quantity purchased during a period if the variance is calculated at the time of material purchase
• Actual Quantity is the quantity consumed during a period if the variance is calculated at the time of material consumption

Analysis

A favorable material price variance suggests cost effective procurement by the company.

Reasons for a favorable material price variance may include:

• An overall decrease in the market price level
• Purchase of materials of lower quality than the standard (this will be reflected in adverse material usage variance)
• Better price negotiation by the procurement staff
• Implementation of better procurement practices (e.g. invitation of price quotations from multiple suppliers)
• Purchase discounts on larger orders

An adverse material price variance indicates higher purchase costs incurred during the period compared with the standard.

Reasons for adverse material price variance include:

• An overall hike in the market price of materials
• Purchase of materials of higher quality than the standard (this will be reflected in favorable material usage variance)
• Increase in bargaining power of suppliers
• Loss of purchase discounts due to smaller order sizes
• Inefficient buying by the procurement staff