Venazio Products uses a standard costing system to assist in the evaluation of operations. The company has had considerable employee difficulties in recent months, so much so that management has hired a new production supervisor (Ralph Moreno). Moreno has been on the job for six months and has seemingly brought order to an otherwise chaotic situation.The vice-president of manufacturing recently commented that "Moreno has really done the trick. Ralph's team-building/morale-boosting exercises have truly brought things under control." The vice-president's comments were based on both a plant tour, where he observed a contented work force, and review of a performance report that showed a total labor variance of $14,000F. This variance is truly outstanding, given that it is less than 2% of the

Question

company's budgeted labor cost. Additional data follow.· Total completed production amounted to 20,000 units.· A review of the firm's standard cost records found that each completed unit requires 2.75 hours of labor at $14 per hour. Venazio's production actually required 42,000 labor hours at a total cost of $756,000.Required: A. As judged by the information contained in the performance report, should the vice-president be concerned about the company's labor variances? Why?B. Calculate Venazio's direct-labor variances.C. On the basis of your answers to requirement "B," should Venazio be concerned about its labor situation? Why?D. Briefly analyze and explain the direct-labor variances.

What will be an ideal response?

Answer 1

A. No. The variance is favorable and small, being less than 2% of the budgeted amount.
B.


C. Yes. Although the combined variance of $14,000F is small, a more detailed analysis reveals the presence of sizable, offsetting variances. Both the rate variance and the efficiency variance are in excess of 21% of budgeted amounts ($770,000). A variance investigation should be undertaken if benefits of the investigation exceed the costs. Put simply, things are not going as smoothly as the vice-president believes.
D. The favorable efficiency variance means that the company is producing units by consuming fewer hours than expected. This may be the result of the team-building/morale-boosting exercises, as a contented, well-trained work force tends to be efficient in nature. However, another totally plausible explanation could be that Venazio is paying premium wages (as indicated by the unfavorable rate variance) to hire laborers with above-average skill levels.