Question

based on this

The actual results for 2020 come in at $110,000 for labour costs. What are two things would you investigate regarding the unfavourable labour results

Prepration Operating Budget forecast for 2020 and 2021
		Actual 2019	FCT 2020	FCT 2021
Industry Market Share		10,00,000.00 20%	15,00,000.00 20%	17,50,000.00 20%
	% of Sale
Sales		2,00,000.00	3,00,000.00	3,50,000.00
Material	25%	50,000.00	75,000.00	87,500.00
Labour	35%	70,000.00	1,05,000.00	1,22,500.00
Factory Overhead	20%	40,000.00	60,000.00	70,000.00
	80%	1,60,000.00	2,40,000.00	2,80,000.00
Gross Profit	20%	40,000.00	60,000.00	70,000.00
Selling	5%	10,000.00	15,000.00	17,500.00
Corporate Overhead	10%	20,000.00	30,000.00	35,000.00
Operating Profit(OP)	5%	10,000.00	15,000.00	17,500.00
Taxes(% of OP)	25%	2,500.00	3,750.00	4,375.00
Net Income	3.75%	7,500.00	11,250.00	13,125.00
	% of Sale
Cash	5.00%	10,000.00	15,000.00	17,500.00
Accounts Receivable	20.00%	40,000.00	60,000.00	70,000.00
Inventory	10.00%	20,000.00	30,000.00	35,000.00
Fixed Assets	100.00%	2,00,000.00	3,00,000.00	3,50,000.00
Total		2,70,000.00	4,05,000.00	4,72,500.00
Account Payable	10%	20,000.00	30,000.00	35,000.00
Debt	Plug to Balance	1,20,000.00	2,33,750.00	2,83,125.00
Common Stock	Fixed	1,20,000.00	1,20,000.00	1,20,000.00
Opening RE		2,500.00	10,000.00	21,250.00
Net Income		7,500.00	11,250.00	13,125.00
Total		2,70,000.00	4,05,000.00	4,72,500.00

Answer 1

2 things to investigate regarding unfavourable labor variance

1. · What was the actual rate of labor paid during the period compared to the standard rate? If variance is unfavourable the Human Resource department should answer why labor was deployed at higher rate compared to the budgeted rate.
2. · What was the actual labor hours deployed in the production compared to the standards set at the beginning of the period? If actual labor hours deployed is more than the standard labor hours the reasons for the same should be investigated. So questions to ask would be whether more labor was needed due to more manual operations compared to the budget?