Question

Handley Manufacturing Company has prepared the following flexible budget for August and is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance.

	Flexible	Variances
	Budget	Price	Efficiency
Material A	$ 50 comma 000$50,000	$ 2 comma 000$2,000F	$ 4 comma 000$4,000U
Material B	62 comma 00062,000	300300U	1 comma 6001,600F
Direct manufacturing labor	80 comma 00080,000	700700U	2 comma 3002,300F

The most likely explanation of the above direct manufacturing labor variances is that​ ________.

A.

the average wage rate paid to employees was less than expected

B.

the company may have assigned more experienced employees this month than originally planned

C.management may have a problem with budget slack and might be using lax standards for both

labor−wage rates and expected efficiency

D.

employees did not work as efficiently as expected to accomplish the job

Answer 1

The given details regarding Direct Manufacturing Labor Costs are as follows :-

Flexible Budget :- 80,000

Direct Manufacturing Labor Price Variance = 70,700 ( Un-favorable )

Direct Manufacturing Labor Efficiency Variance = 2,300 ( Favorable )

While interpreting the Variance results, we have to understand what scenario or situation any given variance is depicting.

It can be seen that the Direct Manufacturing Labor Price Variance is Unfavorable, which denotes that the Actual Price of Direct Manufacturing Labor was more that the Standard or the budgeted Direct Manufacturing Labor Cost. The increased cost can be due to many factors like, Labor is called specially from a far off location or may be we use excessively skilled labor to get our works done and so we may have t pay Labor costs more than the budgeted once.

It can also be seen that the Direct Manufacturing Labor Efficiency Variance is Favorable, which states that the Actual Quantity Produced is more that the Standard/Estimated Quantity.

Hence, we have to look for the option that can justify the above mentioned logics/explanations.

The suitable Solution looks like the Option B. As it says company may have assigned more experienced labor, which justifies the increased Actual Labor Costs hence giving an un-favorable Direct Manufacturing Labor Variance and also enhanced Actual Production than the standard Quantity, and hence a favorable Labor Efficiency Variance.

1. Average wage rate if paid less, then the Price Variance should be Favorable but the Price Variance is Un-favorable, hence this is not our solution.
2. This is our solution.
3. Budget Slackness is not a justified reason in most of the scenarios as the Budget is always an estimate and it is never meant to be accurate.
4. It says labor may have not worked as efficiently. But we have a favorable Efficiency Variance hence this explanation also does not fit the Variances given