Reference no: EM131778025

Problem - Variance Analysis

The plant manager decides that what is needed is an objective appraisal of what should be done.  He hires June Collins of Collins and Collins, CPAs.  June recommends that the Charlotte plant should use standard cost variance analysis.   While not all three product managers agree that this is the best course of action the plant manager makes the final decision and asks June to perform the analysis.  June asks that the three product managers aggregate their production information.  The following schedule is the result of the request.

Variance Analysis

Variance                                                Stated as                         Variance

Materials Price Variance                          Per ounce price                Favorable

Materials Quantity Variance                     Ounce per unit                  Unfavorable

Labor Rate Variance                               Per hour                          Unfavorable

Labor Efficiency Variance                        Time per unit                   Favorable

Required:

1. Explain how each of the above variances could be explained.

2. Explain how the variances could explain the following situations:  For instance: Inspection time increase could be caused by either poor material leading to sub-quality products or using cheaper more inexperienced labor.  This would result in a favorable materials price variance and/or an unfavorable labor efficiency variance indicating that the workers are taking too long to construct the product.

Each of the below situations are to be considered independent               

Scrap Material decreased

Return Orders increased

Rework Time decreased

Average Unit Cost increased

Unexpected Downtime increased

Sales was less than budgeted

Volume-related revenue was less than anticipated (in this instance the company is selling multiple products)