C39MT1 Variance Analysis Workshop Outline Solution

(c)

Material cost variances are unfavourable for usage, but not for price. The
price paid for materials could suggest that there was a compromise in quality
that had a knock-on effect on usage. However, increased usage in this
circumstance could reflect a genuine loss of control. The significantly larger
than expected production may have meant that management and workers were
overstretched leading to higher rates of waste than normal. In any case it is
important that further attention is paid to this area.
Labour variances indicate a rise in the rate paid for labour. Given that
production is higher than that which was originally budgeted, it is possible that
the overspend was incurred through overtime payments. There is a positive
efficiency variance that indicates that the productivity of labour was
heightened during the period, which is very positive.
Variable overhead spending shows a substantial rise, which requires
management attention, but again might reflect wastage due to high production
levels. The variable overhead efficiency variance aligns with that which
occurred in labour, as labour hours are regarded as a driver of this cost.
Fixed overhead shows an unfavourable spending variance. This might reflect
additional expenditure required to increase capacity due to high production
levels. It also might indicate that some cost items classified as fixed are not
really fixed. Instead they might have reduced with the reduction in volume,
showing a behaviour that relates more closely to variable cost than fixed.

(d)

It may be possible to use variances as one factor indicating a managers

performance, but caution must be exercised. It must be remembered that the

manager in question may not have control over all the factors that could cause
a variance. For instance, it is likely that materials purchases and labour rates
are outwith the control of the production manager as they will be undertaken
by purchasing and HR respectively. The key when using variances for
performance measurement is to ensure that the principle of controllability
applies: i.e. that the manager is only measured where he or she has a direct
influence over the outcome.
Additionally we must be aware that some dysfunctionality may arise from
managers, in order to achieve their bonus, striving to ensure that negative
variances do not arise. For instance, volume related variances could be
eliminated simply by producing more units of output. This additional
production may not be required by the organisation and will lead to
unnecessary and costly stocks of goods. Thus, ensuring positive variances can
in some cases produce effects that are not congruent with the goals of the
organisation.