Interpreting the variances is a key part of managerial accounting. For each scenario described below, indicate whether the result would be favorable or unfavorable.ScenarioFavorableUnfavorablea. The production manager finds a new supplier of direct materials. Its prices are 30% less than the current supplier. Is the effect on the direct materials price variance favorable or unfavorable???b. The standard direct materials quantity per product is 2 units. In training new personnel, additional material is often wasted. For his first two-week period, a new employee used 3 units per product. Is the direct materials quantity variance favorable or unfavorable???c. A new collective bargaining agreement among union employees guarantees a wage increase of 5%. What would the effect on the
direct labor rate variance be???d. A new hiring manager prioritizes experience over cost when hiring employees. As a result, the experienced hires produce goods more efficiently than inexperienced counterparts. What effect does this have on the direct labor efficiency variance???e. Consider the same facts as above. What effect do you think this would have on the direct labor rate variance???Now consider each scenario with sustainability metrics in mind. How might the answers change?ScenarioFavorableUnfavorablea. The production manager finds a new supplier of direct materials. Its prices are 30% less than the current supplier. Is the effect on the direct materials price variance favorable or unfavorable???b. The standard direct materials quantity per product is 2 units. In training new personnel, additional material is often wasted. For his first two-week period, a new employee used 3 units per product. Is the direct materials quantity variance favorable or unfavorable???c. A new collective bargaining agreement among union employees guarantees a wage increase of 5%. What would the effect on the direct labor rate variance be???d. A new hiring manager prioritizes experience over cost when hiring employees. As a result, the experienced hires produce goods more efficiently than inexperienced counterparts. What effect does this have on the direct labor efficiency variance???e. Consider the same facts as above. What effect do you think this would have on the direct labor rate variance???
What will be an ideal response?
| Scenario | Favorable | Unfavorable |
| a. The production manager finds a new supplier of direct materials. Its prices are 30% less than the current supplier. Is the effect on the direct materials price variance favorable or unfavorable? | X | ? |
| b. The standard direct materials quantity per product is 2 units. In training new personnel, additional material is often wasted. For his first two-week period, a new employee used 3 units per product. Is the direct materials quantity variance favorable or unfavorable? | ? | X |
| c. A new collective bargaining agreement among union employees guarantees a wage increase of 5%. What would the effect on the direct labor rate variance be? | ? | X |
| d. A new hiring manager prioritizes experience over cost when hiring employees. As a result, the experienced hires produce goods more efficiently than inexperienced counterparts. What effect does this have on the direct labor efficiency variance? | X | ? |
| e. Consider the same facts as above. What effect do you think this would have on the direct labor rate variance? | ? | X |
| Scenario | Favorable | Unfavorable |
| f. The production manager finds a new supplier of direct materials. Its prices are 30% less than the current supplier, but those price decreases come with 40% additional environmental cost (in shipping from abroad) and an indirect labor cost of 40% (because workers abroad are not compensated at what the company deems a fair wage). Is the effect on the direct materials price variance-with sustainability in mind-likely favorable or unfavorable? | ? | X |
| g. The standard direct materials quantity per product is 2 units. In training new personnel, additional material is often wasted. For his first two-week period, a new employee used 3 units per product. Such learning is encouraged by the managerial accountant because it results in long-term efficiency. Is the direct materials quantity variance favorable or unfavorable from a sustainability perspective? | ? | X |
| h. A new collective bargaining agreement between union employees guarantees a wage increase of 5%. The company's goal is to pay what it deems "livable wages" to 100% of its employees by 20x0, and this change moves it closer to that goal. What would the effect on the direct labor rate variance be with sustainability metrics in mind? | X | ? |
| i. A new hiring manager prioritizes experience over cost when hiring employees. As a result, the experienced hires produce goods more efficiently than inexperienced counterparts and produce less waste. What effect does this have on the direct labor efficiency variance from a sustainability perspective? | X | ? |
| j. Consider the same facts as above. What effect do you think this would have on the direct labor rate variance? (Assume this company's goal is to pay 100% of its employees a "livable wage" by 20x0, and this change moves it closer to the goal.) | X | ? |
a. Because the price of the input item decreases by 30%, this represents a favorable direct materials price variance.
b. Because additional input item is wasted in training the new employee, this represents an unfavorable direct materials quantity variance.
c. Because the hourly wage increased for hourly employees, this represents an unfavorable direct labor rate variance.
d. Because the employees would be producing more product per hour, the effect on the direct labor efficiency variance would be favorable.
e. Presumably, the more experienced (and more efficient) workers would be paid a higher hourly rate, which would result in an unfavorable direct labor rate variance. A managerial accountant would weigh the favorable benefits of the experience against the unfavorable rate variance to determine the best course of action for the company.
f. Although the price of the input item decreases by 30%, the increase in environmental and human costs is likely enough to make this an unfavorable variance in terms of sustainability metrics. (But remember, it is up to the managerial accountant to weigh all competing costs and act in the best interest of the company based on its core operating philosophy.)
g. Even though the waste is justified as learning, it is still waste. As such, this is still an unfavorable direct materials quantity variance. To mitigate the waste, the manager may identify a secondary use for the waste or an acceptable recycling program.
h. Because the hourly wage increased for hourly employees, this represents an unfavorable direct labor rate variance in dollars, but it moves the company closer to its people goals (one of the three Ps of sustainability accounting). As such, this is a favorable variance with sustainability metrics in mind.
i. Because the employees would be producing more per hour with less waste (both in terms of time and in terms of materials), the effect on the direct labor efficiency variance would be favorable from a sustainability perspective.
j. Presumably, the more experienced (and more efficient) workers would be paid a higher hourly rate, which would result in an unfavorable direct labor rate variance. A managerial accountant would weigh the favorable benefits of the experience against the unfavorable rate variance to determine the best course of action for the company. The analysis would be complemented by the company's goal to pay its workers more, which would be favorable from a sustainability perspective.
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