A company was experiencing slow production rates, and lower production volumes than demanded by management, so a new factory manager was hired. Upon investigation, she found that the workers were poorly motivated and not closely supervised. Midway through the quarter, she started an incentive program and paid out cash bonuses when workers hit their production targets. Within a short time, production output increased, but the bonuses had to be charged to the direct labor budget, and she was worried about the impact of these costs on operating income. This situation could have produced a (n) :

Unfavorable direct cost variance

Explanation:

In this question, we have a classic example of unfavorable direct cost variance.

Direct costs are those, as the world implies, directly involved in the production process. The specific materials that are used to produced something, and the specific amount of labor that is employed to produce it, are what is known as direct costs.

In the case of labor, these costs are known as direct labor costs.

In the question, the manager implemented a measure to improve labor productivity: monetary incentives for those who increased their quota.

However, her actions led to a increase in direct labor costs because the workers responded positively to the incentive and many were able to clain the benefits.

The manager will have to evaluate if the incentives can continue, or if the policy needs to be changed.