Unfavorable Direct Labor Inefficiency Variance
Direct labor efficiency variance is the dissimilarity between the time taken by an organization to manufacture a certain number of units and the standard time set to manufacture the same units multiplied by standard direct labor rate. Direct labor efficiency variance can be favorable or unfavorable variance. Favorable direct labor efficiency variance is a situation where the employees in an organization manufacture a certain number of units in less time as compared with the standard time set to manufacture the same units (Miller-Nobles, Mattison, & Matsumura, 2018). In unfavorable direct labor efficiency variance, the workers incur more time as compared to standard time allowed in manufacturing a certain number of units. The formula to calculate the direct labor efficiency variance is (Actual hours worked X Standard rate) – (Standard hours allowed x standard rate).
Considering the Fraud case 23-1, the behavior portrayed by the employees will cause unfavorable direct labor efficiency variance. The employees are recording standard working hours in the organization, yet they have not worked for the same hours in the production process. In such case, when the time recorded by the employees is compared with the units produced, it will not match. Every organization is aware that the workers will produce a certain number of units after a given number of hours at a specific rate (Miller-Nobles, Mattison, & Matsumura, 2018). In the case study, the employees record false hours in the logging system, which indicate that they have worked for the standard 8 hours per day but have worked fewer hours in reality. Considering the hours recorded by the employees, the organization is performing well but regarding the units produced in the recorded time will be less. The less number of hours worked by the employee show that they receive wages, but the labor rate does not translate to the units produced. Additionally, the employees spend the time set to be utilized in the product to undertake other activities, yet they record that have worked. In such instance, the employees will incur more time to produce a certain number of units as compared with the standard time leading to unfavorable direct labor efficiency variance.
Many organizations experience challenges where the employees’ time cards show the employees are working even when they are away during off times, lunch break, and even during sick leave. Organizations pay such employees for hours that they have not worked leading to unfavorable direct labor efficiency variance. In some organizations, the employees record the hours worked manually through their supervisors or individually at the end of the working day. In such cases, the employees will collaborate with the supervisors to record false hours even when they absent in the organization. The behavior experienced in the production department as portrayed in the case study was due to the manual recording of the hours worked by the employees. Employees would record the standard working hours despite having a lunch break, reporting late, and being absent or attending to other duties in the organization. The employees in the department were recording what would favor them in the expenses of the organization, as they were paid extra hours that have not worked (Miller-Nobles, Mattison, & Matsumura, 2018). Additionally, the payment to the workers would not rhyme with the units produced within the recorded hours worked. As Jeff explained, the employees were recording the hours worked on the spreadsheets, which could be presented to the management to claim payment. The employees would have time to record the hours of the previous days even when they were not present in the organization. The organization should consider installing the logging system, which is real-time where the employees’ time records could be stored in the system immediately, and employees cannot tamper with it quickly. Although the logging system does not tamper proof, it is better as compared to the manual recording where employees are stealing from the organization.
The employee’s activities portrayed in the case study are fraudulent in different ways. The employees are stealing from the organization as they are paid for the number of hours that they have not worked. For example, the time when the employees are out for lunch, being late for work, sick leave, and engaging in other activities like cleaning needs to be deducted from the numbers of hours recorded. In the case study, the employees are paid for such hours in the production department yet they did not engage in production activities (Miller-Nobles, Mattison, & Matsumura, 2018). Additionally, the organization is incurring losses due to direct labor inefficiency variance resulting from the activities undertaken by the employees and the behavior portrayed. When the employees become absent, they engage in other activities, which earn them money at the expense of the organization. Such activities are fraudulent, as the employees earning from other sources yet they are paid that they have worked for the organization.
Besides the issues portrayed, significant issues are experienced in various countries globally. Organizations experiencing such issues should adopt the logging and monitoring systems, which will enable them to reduce the fraudulent activities when recording employees’ hours worked (Miller-Nobles, Mattison, & Matsumura, 2018). The logging system can be monitored easily as compared with the manual system controlled by the employees that they can record hours that favors their interest in the expense of the organization.
Miller-Nobles, T. L., Mattison, B., & Matsumura, E. M. (2018). Horngrens accounting (12th ed.). United States: Pearson Education, Inc.