The head of the research and development department at a manufacturing organization believes that his team lacks expertise in some areas, and he decides to hire more experienced researchers to assist in the development of a new product. Which of the following variances are likely to occur as the result of this decision?
1. Favorable labor efficiency variance.
2. Adverse labor rate variance.
3. Adverse labor efficiency variance.
4. Favorable labor rate variance.
The decision to hire more experienced researchers is likely to lead to higher labor costs, resulting in an adverse labor rate variance. This is because more experienced researchers generally command higher wages. However, these skilled researchers are expected to work more efficiently, thus leading to a favorable labor efficiency variance. Consequently, the most appropriate variances are a favorable labor efficiency variance and an adverse labor rate variance.
The answer is actually ‘A’ (1 and 2). Here’s why: An adverse labor rate variance indicates higher labor costs incurred during a period compared with the standard. Causes for adverse labor rate variance include hiring of more skilled labor than anticipated in the standard (this should be reflected in a favorable labor efficiency variance). In this scenario, manager had to hire MORE workers to get the job done – so now he has to pay both the old workers AND the new workers; therefore the labor rate is HIGHER than it should’ve been (and that’s a bad thing). However, because he hired more skilled workers, the job is going to be more efficiently done, so it’s a favorable labor efficiency. So the answer is A, 1 & 2: Favorable labor efficiency, but an adverse labor rate.
Its definitely A.
I also think it's A. 1 and 2.
In Gleim book SU 14 page 19 there is an example for both absorption and variable costing and the direct labour (answer 1), direct materials and variable overhead are considered product costs under variable costing and variable and fixed S&A expenses are period costs. How come D is the correct answer?