EXERCISE 10-9 (CONTINUED)

2. A variance usually has many possible explanations. In particular, we should always keep in mind that the standards themselves may be in-correct. Some of the other possible explanations for the variances ob-served at Dawson Toys appear below: Materials Price Variance Since this variance is favorable, the actual price paid per unit for the material was less than the standard price. This could occur for a variety of reasons including the purchase of a lower grade ma-terial at a discount, buying in an unusually large quantity to take advan-tage of quantity discounts, a change in the market price of the material, or particularly sharp bargaining by the purchasing department. Materials Quantity Variance Since this variance is unfavorable, more ma-terials were used to produce the actual output than were called for by the standard. This could also occur for a variety of reasons. Some of the pos-sibilities include poorly trained or supervised workers, improperly adjusted machines, and defective materials. Labor Rate Variance Since this variance is unfavorable, the actual aver-age wage rate was higher than the standard wage rate. Some of the pos-sible explanations include an increase in wages that has not been re-flected in the standards, unanticipated overtime, and a shift toward more highly paid workers. Labor Efficiency Variance Since this variance is unfavorable, the actual number of labor hours was greater than the standard labor hours allowed for the actual output. As with the other variances, this variance could have been caused by any of a number of factors. Some of the possible explana-tions include poor supervision, poorly trained workers, low quality materi-als requiring more labor time to process, and machine breakdowns. In addition, if the direct labor force is essentially fixed, an unfavorable labor efficiency variance could be caused by a reduction in output due to de-creased demand for the company’s products. It is worth noting that all of these variances could have been caused by the purchase of low quality materials at a cut-rate price.