The labor rate variance essentially measures the difference between the estimated and actual cost of labor. As shown in the above table the direct labor variance turns out to be adverse. This means that the cost of labor incurred was much more than anticipated. This may be due to reasons such as protests by the labor unions for increase in labor rate or increase in the general market price.
|
Direct Labor Efficiency Variance:
|
|
Particulars
|
Amount
|
|
Actual Direct Labor Hours
|
2618140
|
|
Standard Rate per labor hour
|
$50
|
|
Standard Labor Cost for Actual Labor Hours
|
$130,907,000
|
|
Budgeted Labor Cost
|
$95,391,000
|
|
Material Price Variance
|
$35,516,000
|
|
Remarks
|
Adverse
|
The direct labor efficiency variance also turned out to be adverse. This means that the efficiency of the labor in general has worsened and is far away from what was estimated or budgeted. This may be due to the fact that the labor in general is feeling demoralized due to absence of introduction of enough incentive or bonus on the part of the laborers. Another reason may be that the workforce is not skilled enough to meet the budget.
Part D
An imposed budgetary approach refers to the process of preparation of budget by the higher authority or by the officials who are at the higher hierarchical level of the organization. Essentially the budget is prepared by the management and then imposed upon the general staff of the organization. No input from the employees or other staff at lower levels of authority is considered while preparing the budget (Fullerton et al. 2013).
Now if the situation as described in Part C had occurred then Paulo might have been disturbed with the entire outcome and might have taken necessary steps in order to mitigate such disparities between the budgeted and the real outcome. However there might have been a sense of relief prevailing in him as because the budget was not prepared by him and any sort of mistake in it was not his responsibility (Needles et al. 2013).
However in case of a participative budgetary approach which includes all the levels of authority starting from the general employees, the level of urgency and concern felt by Paulo would definitely have been greater. This is because a participative budgetary approach towards preparation of a budget includes the feedback of the supervisors who submit their estimations to the middle level of management who in turn prepare their own estimations and submit them to the management comprising of directors who represent the highest level of authority in an organization. Therefore Paulo in case of a participative approach would be much more concerned and interested in identifying the faults, as because it would be his own responsibility to rectify the errors in the budget and the ways in which it could be made more accurate.
References
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Bryce, H.J., 2017. Financial and strategic management for nonprofit organizations. Walter de Gruyter GmbH & Co KG
Drury, C., 2013. Costing: an introduction. Springer
DRURY, C.M., 2013. Management and cost accounting. Springer.
Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2013. Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations and Society, 38(1), pp.50-71
Garvey, P.R., Book, S.A. and Covert, R.P., 2016. Probability methods for cost uncertainty analysis: A systems engineering perspective. CRC Press
Kokubu, K. and Kitada, H., 2015. Material flow cost accounting and existing management perspectives. Journal of Cleaner Production, 108, pp.1279-1288
Needles, B.E., Powers, M. and Crosson, S.V., 2013. Principles of accounting. Cengage Learning.
Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control. Springer
Williams, J., 2014. Financial accounting. McGraw-Hill Higher Education.
