Question

Part B

Truest plc manufactures metal frames. The variance analysis shown below has been produced for the production department for the last accounting period.

Material price variance 5,000 F

material usage variance 6,000 A

labour rate variance 4,000 A

labour efficiency variance 5,000 F

variable overhead expenditure variance 12,000 A

variable overhead efficiency variance 4,000 A

fixed overhead expenditure variance 5,000 F

F = favourable variance, A = adverse variance

In response to the variance analysis the production manager has made the following comments

1. We were experiencing poor staff morale and a high staff turnover, so I increased wage rates during the period. I believe that this has improved staff morale and produced a positive benefit to the company.

2. I was able to source an alternative supplier for materials. I negotiated a very good price which I believe will save the company a considerable amount of money.

3. We had an additional vehicle for deliveries which was only used when demand was particularly high. I sold this vehicle and hired an additional vehicle only when we needed one.

Required

b. Comment on the performance of the production department based upon the variance analysis and the comments from the production manager provided.

Answer 1

Material variance:

The material cost variance is overall adverse during the period. The price variance is favorable but usage variance is unfavorable. The price variance is favorable due to procurement of material at better price than the standard rate. But the usage variance is unfavorable due to higher actual usage of material compared to the standard quantity of input allowed for actual output. The reason can be due to inferior quality of material used in the production. When price is favorable the quality of material supplied by supplier should be monitored because both are related. A supplier can send inferior quality of material at lower price which impacts the output because it can lead to damages, rework, and inefficiency in the production process. Thus the production manager comments that he has saved material prices is right but it has come at the cost of efficiency and overall material cost variance is unfavorable $1,000

Labor and variable overhead variance

The labor rate has been higher due to increase in hourly wages paid to worker. This has led to favorable efficiency variance due to actual labor hours being lower than the standard allowed for actual output. But the variable overheads spending and efficiency variance based on labor hours is unfavorable to the firm. The overall variable overheads variance is 16,000 unfavorable. Thus the labor is unable to save to the firm on the variable overheads variance and the overall combined variance of labor and variable overheads is unfavorable. Thus the production manager comment is not acceptable that he has increased the hourly wages and given positive benefit to the company.

Fixed overhead variance:

Fixed overhead expenditure variance is the difference between the budgeted fixed overheads and the actual fixed overheads. The variance is favorable due to reduction in vehicle cost which is now taken on need basis which has benefited the firm. The production manager is right in his action on selling the vehicle and hiring an additional vehicle on need basis only.