Question

The production manager of a company, in an effort to gain a promotion, negotiated a new labor contract with her factory employees that required them to bear a greater percentage of benefit costs than before, thus bringing down the cost of direct labor to the company. Shortly afterward, several experienced and highly skilled workers resigned, and were replaced by new employees whose work was very slow during their training period. At the end of the quarter, the company's profits fell 10%. This situation would have produced a(n):

Select one:

A. favorable direct materials cost variance.
B. unfavorable direct labor efficiency variance.
C. unfavorable direct labor cost variance.
D. favorable direct materials efficiency variance.

Answer 1

Answer: Option B. unfavorable direct labor efficiency variance

Explanation:

From the scenario we can relate that when new workers were hired to replace the skilled workers who resigned, the profits fell 10%. This means the result is unfavorable. So we can cancel out the 1st and 4th options. Now, the workers were slow during their timing period this means that their efficiency was low. So this imparts that it is direct labor efficiency variance.

So option B. unfavorable direct labor efficiency variance is correct