Final answer:
True, during times of insufficient demand, retaining a full workforce can lead to an unfavorable variable overhead efficiency variance for firms unless they increase inventories, which is often observed during a recession.
Step-by-step explanation:
The statement is true: If demand is insufficient to keep everyone busy and workers are not laid off, an unfavorable variable overhead efficiency variance often will be a result unless managers build excessive inventories. In a situation where the quantity supplied exceeds the quantity demanded, firms may face a dilemma. Laying off workers may save costs in the short term but risks losing skilled labor that would be costly to replace when conditions improve. On the other hand, retaining workers can lead to underutilization of the labor force and an increase in variable overheads without corresponding revenue generation, resulting in an unfavorable efficiency variance. In effect, during a recession, the economic dynamics can significantly affect the efficiency by which businesses operate, particularly in relation to their labor and overheard management practices.
A recession is characterized by a general downturn in the economy where business failures outnumber successes, often leading to layoffs and unemployment. Firms hesitate to hire new workers or lay off current ones until they are certain that the recession is truly over.
As supply exceeds demand at this time, goods markets and labor markets alike suffer. The existing price and wage levels are too high to clear the markets, contributing to an excess supply situation, and businesses may indeed suffer from unfavorable variances if they choose not to adjust their workforce accordingly.