Early in April, Brice’s cost accountant prepared cost variance summary reports on each of the company’s product lines for distribution at the monthly staff meeting. Among those attending the meeting were (1) the director of purchasing, (2) the production manager, (3) the quality control inspector, (4) the employee grievance representative, and (5) the sales manager. The report they were given pertaining to the production of 20-foot beams is shown in Exhibit 24–7 .
Discuss the causes of specific cost variances.
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Exhibit 24–7
VARIANCE SUMMARY REPORT
Total Variance to Be Explained
Standard manufacturing costs allowed (600 units $98) . . . $58,800 Actual manufacturing costs incurred in March . . . 58,720 Total manufacturing cost variance—favorable . . . $ 80
Breakdown of Individual Variances
Materials price variance—favorable . . . $ 9,000 Materials quantity variance—unfavorable . . . (5,400)
Total materials variance—favorable . . . $ 3,600 Labor rate variance—unfavorable . . . $(1,080)
Labor efficiency variance—unfavorable . . . (2,160)
Total labor variance—unfavorable . . . (3,240) Overhead spending variance—favorable . . . $ 520
Overhead volume variance—unfavorable . . . (800)
Total overhead variance—unfavorable . . . (280) Total manufacturing cost variance—favorable . . . $ 80
BRICE MILLS
COST VARIANCE SUMMARY REPORT FOR 20-FOOT LAMINATED BEAMS FOR THE MONTH ENDING MARCH 31
Confirming Pages
Standard Cost Systems 1049
Let us now consider these cost variances from the perspectives of various department managers.
Accounting The cost accountant opened the meeting by announcing that she had a combination of “good news” and “bad news.” On the bright side, she was encouraged that the company’s total manufacturing cost variance for 20-foot beams was favorable for the first time in many months (albeit only $80). She was especially pleased about the successful effort to control manufacturing overhead costs associated with this product, as revealed by the
$520 favorable overhead spending variance. However, she immediately expressed concern regarding several unfavorable variances experienced across the beams product line during the month. She displayed a PowerPoint slide containing the graphs shown in Exhibit 24–8 on the following page to make her point. In particular, she was troubled by the consistent pat- tern of unfavorable labor rate, labor efficiency, and materials quantity variances shown by the hatched areas in the graph. The remainder of her presentation was spent stressing the severity of these unfavorable variances.
Purchasing The first person to respond to the cost accountant’s comments was the pur- chasing agent. Taking a defensive posture, he stressed that none of the unfavorable variances experienced during the month were under his control. In fact, he bragged that the $9,000 favorable price variance for 20-foot beams “saved the company from financial disaster in March.” He pointed at the Graph for Direct Materials displayed in Exhibit 24–8 and sug- gested that his favorable price variance compensated for the unfavorable usage materials vari- ance created by the production department. He pounded the table, exclaiming that he had
“shopped for price” in three different states, getting what he believed to be the best bargain possible for rough white pine lumber.
Production The production manager stood up and confronted the purchasing agent. He verbally attacked the purchasing department, accusing it of acquiring materials of “grossly inferior quality.” He told the group that the lumber he and his crew had been issued was green and full of knots, warps, and cracks. In his opinion, these defects were the direct cause of the unfavorable materials usage variance for the laminated beams. He also believed that numer- ous production bottlenecks resulting from poor quality materials had caused production out- put in March to be significantly less than normal.
Quality Control The quality control inspector concurred with the production manag- er’s assessment. She noted that many of the company’s product lines, especially its 20-foot beams, either failed to pass inspection or did so only marginally. Never in recent history had there been a month in which she rejected so many beams.
Factory Workers The employee grievance representative is a member of the production crew elected to communicate grievances to management.
His comments provided a unique perspective to what had become an emotion- ally heated meeting. He conveyed to the group that factory morale in March had hit an all-time low. He admitted that every member of the production crew knew productivity was way down (as reflected by the unfavorable labor effi- ciency variances), yet added that everyone thought the inferior materials were the cause of the problem. He concluded by saying that the only good thing about inferior materials is “the overtime pay we earn working extra hours.”
(The $1,080 unfavorable labor rate variance for laminated beams resulted pri- marily from the overtime pay rates.)
Marketing The sales manager argued that, even with overtime and extra shifts, demand during March still exceeded output. He told the company’s cost
accountant that this was one of those occasions when an unfavorable volume variance had severe implications. To illustrate his point, he noted that the unfavorable volume variance associated with the production of 20-foot beams (caused by producing 600 units instead of the normal 700 units) translated directly into $16,000 of lost sales in March. He also worried that
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Exhibit 24–8
GRAPHICAL ILLUSTRATION OF VARIANCES
Actual quantity at std.
price 5
$45,000
Standard quantity at std.
price 5
$39,600
Actual quantity at actual price 5
$36,000
$ Cost
Standard quantity, 158,400
Actual quantity, 180,000
Unfavorable Favorable
Actual hours at actual rate 5
$14,040
Standard hours at standard rate 5
$10,800
$ Cost
Standard hours, 900
Actual hours, 1,080
UnfavorableUnfavorable
Graph for Direct Materials
Graph for Direct Labor
Actual hours at standard rate 5
$12,960
Hours Board- feet
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Concluding Remarks 1051
the beams that were sold may not have been of the quality customers had come to expect. His remarks raised questions regarding the company’s legal liability should a beam fail because of structural defects.