Performance of the production manager for the month of November
The total labour rate variance calculated in part (a) suggests that the production manager has managed to secure labour at a lower rate than budgeted (favourable variance of $7,200). However, the total labour efficiency variance (adverse variance of $21,000) would appear to indicate that he or she has been extremely poor at controlling his or her staff's efficiency.
These variances should be split into planning and operational variances to give a truer indication of performance. Planning variances arise due to inaccurate planning and/or faulty standards (factors that are outside the control of production manager). Therefore, the production manager should only be assessed on operational variances.
Labour rate
The labour rate operational variance was $nil. This means that the workforce were paid the agreed reduced rate of $11.40 per hour. It is unlikely that the production manager paid anyone for overtime, as this would have increased the hourly rate.
The production manager cannot take credit for the favourable total labour rate variance. The labour rate planning variance of $7,200 indicates that the reduced labour rate was beyond the production manager's control and was secured by the company.
Labour efficiency
The total labour efficiency variance is $21,000 adverse.
The planning variance is $24,600 adverse. This is because the standard labour time per batch was not updated in November to reflect the fact that it would take longer to produce the truffles as a result of the retailer requesting the truffles to be made slightly softer. The production manager cannot be held responsible for this variance.
In contrast, the operational variance is $3,600 favourable. When the truffle recipe changed in November, it was expected that the production process would take 20% longer for the first month as the workers became used to working with the new ingredient mix. The workers actually took less than the 20% extra time predicted, yielding a favourable operational variance. The production manager can take credit for this variance.
In summary, the production manager performed well in the month of November.
