A company was experiencing slow production rates, and lower production volumes than demanded by management, so a new factory manager was hired. Upon investigation, she found that the workers were poorly motivated and not closely supervised. Midway through the quarter, she started an incentive program and paid out cash bonuses when workers hit their production targets. Within a short time, production output increased, but the bonuses had to be charged to the direct labor budget, and she was worried about the impact of these costs on operating income. This situation could have produced which of the following variances?

Question

Quizplus · Accepted Answer

The introduction of cash bonuses for hitting production targets would increase the cost of direct labor per unit, leading to an unfavorable labor price variance. This is because the labor price variance measures the difference between the actual cost of labor and the expected (or standard) cost of labor. If workers are paid bonuses on top of their regular wages, the actual cost of labor increases, causing this variance to be unfavorable.

A Company Was Experiencing Slow Production Rates, and Lower Production