Question

PEZ Candy Inc. produces the popular small candy that is dispensed in collectible flip-top dispensers. PEZ candy was invented as a breath mint in Vienna, Austria, in 1927. The name PEZ is derived from “pfefferminz” which is the word for peppermint in German.

In the United States, PEZ candies are produced in a factory in Connecticut since 1973. The PEZ candies are made from about 95% sugar, which makes the PEZ product cost particularly sensitive to changes in the cost of sugar. The cost of sugar in the United States has been significantly increasing over the past year, due in least at part, to preliminary tariffs imposed by the U.S. government on Mexican sugar. In addition, the cost of labor has been increasing due to increases in the minimum wage in the U.S. For these reasons, PEZ expects to raise its prices in 2015.

If the related cost standard is not adjusted, what variance(s) will be impacted by the rising cost of labor? What department would typically be responsible for explaining this variance(s)? (paragraph form)

Answer 1

In this case if the related cost standard is not adjusted then the variance that will be impacted by the rising cost of labor is the “direct labor rate variance”. This variance measures the difference between the actual and the expected costs of labor. The formula for the direct labor rate variance = (standard direct labor rate – actual direct labor rate)*actual direct labor hours.

Increase in minimum wages in USA will lead to constant increase in cost of labor in USA and as such the standard direct labor rate should be adjusted upwards. In case this is not adjusted then the difference between actual rate and standard rate will keep on increasing.

The department that will typically be responsible for explaining this variance will be the accounting and the costing department. This department will be responsible for making budgets and setting cost standards. Variances are computed by comparing the standards with the actuals to determine the variances.