466 ACCOUNTING FOR MANAGERS
of the final product. However, the adverse labour and overhead variances cannot
be ignored.
Labour cost 3.3% less (£5/£150), which may be the result of lower-paid employ-
ees or less overtime. However, 5% more labour units than expected have been
used (50/1,000). This may be linked to the lower materials usage, which may have
caused quality problems. The overhead rate is 2.85% higher (£2/£70) and, as usage
follows labour usage, this is also 5% higher (50/1,000).
Consequently, if the change in materials has caused excess labour to be worked,
then the favourable materials variance of £4,300maybemorethanoffsetbythe
adverse labour usage (£7,500) and adverse overhead usage (£3,500), resulting in
an overall adverse variance of £6,700. This is offset by the favourable rate variance
on labour (£5,250) less the adverse rate variance on overhead (£2,100). The danger
is that the adverse usage variances persist while the rate variances are eliminated.
These issues are particularly important if the effect of the variances has been to
reduce the actual production volume from 1,050 to 1,000 units! The most important
questions are therefore what usage and rates will persist in the future? And is there
a quality problem caused by materials that is influencing labour productivity?
Of course, the actual production situation may be something different to what
has been described here. In a real business situation, managers would undertake
an investigation into the causes of the material, labour and overhead rate and
usage variances. In the absence of such an investigation, the above comments may
be reasonable conclusions to draw from the variance analysis.