Bhimani, Horngren,
Datar and Rajan,
Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012 In the Sofiya example,
labour is a variable cost, so it is appropriate to calculate labour efficiency variances. However, if labour is viewed as more of a fixed cost, workers are paid regardless of the amount of production. If the firm has excess capacity, then workers efficiency is not a vital issue as long as they are efficient enough to produce sufficient units to satisfy demand. Even if workers were more efficient
and finish the work quickly, they would still get paid the same amount (since labour is a fixed cost. However, managers who are evaluated on labour efficiency variances maybe tempted to improve this variance by increasing production. If there is excess capacity, this extra production increases stock, counter to recent stock reduction initiatives (e.g. JIT).
Share with your friends: