Question

Star Industries computes variances as a basis for evaluating the performance of managers responsible for controlling costs. For several months, the labor quantity variance has been unfavorable. Briefly explain what could be causing the unfavorable labor quantity variance and indicate what type of corrective action, if any, might be taken.

Answer 1

The labor quantity variance tells us about the efficency of the labor in production activities. An unfavorable direct labor quantity variance implies there is inefficeny in the labor due to which they require more actual hours than standard permissible to produce the given output. The reasons for this efficency could be:

• Inexperience in labor
• Lack of proper training and development
• Negligence in production
• Idle time caused by machinery breakdowns and maintenance
• Fatigue and other health issues of labor
• Idle time caused by movement between tasks
• Standards set are erroneous (rarely)

These problems can be dealt in following ways:

• Implementing proper and regular training and developmental sessions can reduce inefficency caused by inexperience or lack of knowledge in laborers.
• Implementing strict measures and policies to deal with laborers indulged in negligence in discharging tasks
• Discarding inefficient machines and implementation of new and powerful machines or refurbishing exisitng machines to reduce breakdowns.
• Designing factory layouts to minimise unnecessary movement within and between tasks.
• Using learning curve, labor plans and better costing techniques to set more achievable and error free standards and also introduce product based rewards.