EXERCISE 10-15 (CONTINUED) ALTERNATIVE SOLUTION

90,000 hours ($7.85 per hour – $8.00 per hour) = $13,500 F Labor efficiency variance = SR (AH – SH) $8.00 per hour (90,000 hours – 75,000 hours) = $120,000 U Problem 10-27 (continued) No, the labor efficiency variance is not appropriate as a measure of per-formance in this situation. The reasons are: • Labor is largely a fixed cost rather than a variable cost since the company maintains a stable workforce to operate its flow line. Thus, the variance is not an effective measure of efficiency. • In a JIT environment the goal is to produce only as needed to meet demand. This often conflicts with the goal of having high labor effi-ciency, which requires that labor be fully utilized producing output. If that output is not really demanded by customers, the result of fully utilizing labor is a buildup of excess work in process and finished goods inventories. This is anathema in a JIT environment. Unfortu-nately, the situation posed in the problem is a common one as com-panies switch from a traditional system to JIT, and sometimes JIT doesn’t work because of misplaced emphasis on efficiency variances. In a JIT setting, it is an interesting paradox that one of the “costs” of greater efficiency on the production line is greater “inefficiency” on the part of labor as it is occasionally idle or as it spends time at vari-ous tasks other than producing goods.