Question

Variance Analysis Describe how there may be a variance interaction (trade-off) effect when a favourable Direct Labour Price variance is recorded at the same time as an unfavourable Direct Labour Quantity (Efficiency) variance. How might such variances occur and how should such variances be investigated?

Answer 1

Direct labor price variance is favorable when the actual rate per hour is lower than the standard rate per hour. Direct labor efficiency variance is unfavorable when the actual labor hours used for production is more than standard labor hours allowed for actual production. A Direct labor price variance has a relation with the direct labor efficiency variance. Direct labor can be procured at lower cost in the market in order to ensure the rate variance is favorable. But the labor may not possess the required skills to do the job and they may take more actual labor hours than standard hours allowed. This will lead to unfavorable labor efficiency variance. A firm needs to do a trade off between the low rate labor and the actual hours in production to ensure the overall variance is favorable to the firm and it does not lead to unfavorable variance and cause adverse impact on the results.

A firm should investigate why low cost labor was obtained with lower skills. The procurement of labor should be in line with the production requirements. Also the production training and techniques used by the labor should be investigated in order to understand the loss of efficiency factor in actual labor hours spent in the production.