Question

CASE: – VARIANCE ANALYSIS PERFORMANCE EVALUATION Envision yourself being the controller of Company Z. Company Z’s Production consistently shows highly unfavorable efficiency variances for direct materials and direct labor. For the same periods, Z’s Purchasing Department shows highly favorable price variances for direct materials and direct labor

. 1. On the basis of these variances, would you conclude, without further investigation, that the Purchasing Department is performing well and should be rewarded, and that the Production Department falls short of it efficiency standards and its operations need to be re-configured?

2. Could there be other reasons than superior performance of the Purchasing Department and inadequate performance for the Production Department that might explain the price and efficiency variances for the direct costs of the departments? If so, please explain what these other reasons could be.

3. Could the above variances also hide the possibility of inadequate performance of the Purchasing Department and Superior Performance of the Production Department? Could you outline such scenarios?

4. As the controller, what steps you would take to acquire more information to analyze the variances described above, identify their causes, and decide on actions required to rectify any faults?

Answer 1

Answer;-

1)No,one should not conclude without any further investigation and just by seeing favorable price variance of Direct material and labour that the purchasing department is performing well and by seeing the highly unfavorable efficiency variance of direct and labour that the production department is not performing well.Based on the above information one should not start operations to reconfigure the production department and warding purchase department.

2)By seeing the above favorable and adverse variances the decision makers’ first reaction might be to praise the manager who is responsible for buying the materials from a cheaper source than anticipated and reprimand the manager who is responsible for using the material.But there are much points to be analysed further.

(a)Favorable price variance may be resulted from buying low quality products and at low price(which will have an affect in unfavorable usage variance)/ by using low skilled workforce which need to handled by high skilled workforce.so in case of unfavorable usage variance along with production department and purchase departments both are responsible.

(b)Favorable price variance may resulted from buying large quantities of materials in order to have high discount,this may in turn will increase the large quantity of inventories in godowns which will results in high material storage and handling costs.

There has never been a time when variances analysis alone tells the whole story, i.e. variance analysis cannot tell you the cause(s) of something. It only draws your attention to areas that needs further investigation.

3)Yes,from the analysis given in the question there is a possibility that hide the inadequate performance of the purchasing department and superior performance of the production department.The following are some of the cases;-

(a)When the purchasing department purchases low quality of material at low cost.In such case more quantity of material materials may be consumed which results in inefficiency of production manager but actually it is the inefficiency of purchase department.so,in this case superior performance of the production manager is hided.

(b)purchasing large quantities at huge discounts which increases the holding and storage costs which will effect the performance of production manager.in this case also even though the production manager is efficient he is blamed for the inefficiency of purchasing department.

4)As a controller based on the data given in question,i will not come to any conclusion. I will investigate further even in case favorable variances.The following are the steps taken by me:-

a)To check the quality of the materials purchase and compare it with market standards.will further analyse the effects caused by such usage in production.

b)To check the bargaining power of our purchase manager.whether the huge discounts is purely as result of strategies of him.

c)To check efficiency of workers whether the unskilled worker are appointed in place of high skilledworkers and paying lower wages.