Question: There are numerous forms of variances in budgeting (the difference between a standard and the actual cost). We read how variances can be favorable (the company makes money) or unfavorable. Sometimes, a favorable variance leads to an unintended negative consequence (such as when a burger joint uses less meat in its patties, which causes dissatisfied customers who fail to return to the restaurant).
- Now you come up with an example of variances. Think of a company that is manufacturing a product. What kinds of materials are required?
- What is the standard for employee productivity? What are the alternatives for cheaper materials and labor? Provide enough information in your example so that your peers can answer the following questions:
- What are the quantity standard and the price standard in your peer's example?
- What effect, if any, would you expect poor-quality materials to have on direct labor variances?
- If variable manufacturing overhead is applied to production on the basis of direct labor-hours and the direct labor efficiency variance is unfavorable, will the variable overhead efficiency variance be favorable or unfavorable? Could it be either?