A company’s "value chain" is its chain of activities for transforming inputs into the outputs that customers value. This process of transformation includes all of the primary activities (business functions) that add value to the product or service, as well as support activities. It involves functions from R&D through production to marketing and sales, and on to customer service, including the activities that play supporting roles such as information systems, materials management, and human resources. When a company has a favorable labor price (rate) variance, it is because the company has paid hourly wage rates that are lower than the standard wage rates. Usually, that occurs when the company has employed workers who are less qualified than the workers they expected to have. Use of less qualified workers can lead to a higher probability that the products produced and sold will be of lower quality and have more defects. Lower quality products and higher defective rates will lead to increased costs for customer service, as the customers who buy the products will have more difficulty with them. It can also lead to higher warranty costs, because more products will need to be repaired or replaced for customers during the warranty period. The amount gained from the favorable labor price variance, and possibly even more, may be lost through greater unfavorable variances further down the value chain.
A direct labor price variance is not caused by actual production volume being less than budgeted production volume.
The labor efficiency variance measures whether human resources are being used efficiently. The labor price (rate) variance does not.
There is no reason to believe that circumstances giving rise to the favorable variance will not continue in th future.
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