SU Using Standard Costing Information to Improve Efficiency in Companies Discussion

I’m working on a accounting discussion question and need an explanation to help me study.

Discussion: Using Standard Costing Information to Improve Efficiency

As head plant manager, overseeing the entire production cycle, you have received a report from your accounting staff showing the results of your standard costing practices, shown below:

• Materials Price Variance – 80,000 Favorable
• Materials Quantity Variance – 60,000 Unfavorable
• Labor Rate Variance – 75,000 Unfavorable
• Labor Efficiency Variance – 90,000 Unfavorable

It is your job to bring these variances more in line so that the plant runs more efficiently and effectively.

What are the first steps you take for corrective action, to whom do you address this variance problem, and why do you feel that they should be held responsible

Do the discussion then response each posted # 1 to 3 down below.

Posted 1

Each of these variances indicates something different. The materials price variance shows that less was spent on materials than had been planned, while the materials quantity variance shows that more materials were used in production than was planned. Additionally, the labor rate variance and the labor efficiency variance indicate that more workers were paid more and spent more time on direct labor than had been planned.

At first glance, it looks as though all of the unfavorable variances were under the production manager’s supervision, making them responsible for them. It also looks like the purchasing manager did a good job keeping costs low because they are generally responsible for the materials price variance, which is favorable. However, it may not be so simple. I would start by speaking with the production manager and the purchasing manager, to find out what extenuating circumstances there may have been that caused these variances.

There are two situations that I think could have happened. First, the purchasing manager may have cut costs by buying low-quality materials, which would explain the favorable materials price variance. It would also explain why there is an unfavorable materials quantity variance and unfavorable labor efficiency variance. Low-quality materials can cause more waste and additional time spent to produce the necessary number of units. The second situation is that the production manager is not overseeing production carefully, and highly-paid, highly-skilled workers are performing tasks that require little skill, which would cause the unfavorable labor rate variance. Lack of supervision could also cause the unfavorable labor efficiency variance if workers are wasting time and the unfavorable materials quantity variance if they are wasting materials.

In the first situation, the purchasing manager would be responsible not only for the favorable material price variance but also the material quantity variance and potentially the labor efficiency variance. In the second situation, the production manager would be responsible for the unfavorable labor variances and the material quantity variance. Setting quality standards for purchasing materials and increasing labor supervision could aid in bringing these variances back into line.

Posted 2

But I would start with confirming a few assumptions with our purchasing manager. I would point out the variances and ask if he/she knows why we had an unfavorable variance with materials quantity, while at the same time we had a favorable variance with material price. It appears we saved a bit too much money on our materials (as noted by a favorable materials price variance of $80,000) but then used 60,000 more units than what our standard quantity should have been. The variances suggest we are using an inferior product that requires way more units than the standard product. It could also be argued that the 60,000 additional units of material is what caused the increase in labor efficiency variance, further causing the labor rate variance to increase due to overtime. To confirm this assumption I would inquire with the production manager to find out why he/she thinks we had such an overrun in labor hours. My guess would be the materials we used caused a bunch of problems and of course took way more material than what our standard material uses. If my assumptions proved positive, I would then review the findings with the purchasing manager and confirm he/she knows to order the higher quality material from now on, not necessarily the cheapest. This would be an excellent use case on what happens when you focus strictly on lowest cost. Posted 3

The variance analysis cycle is used to evaluate and improve performance (Garrison, Noreen, & Brewer, 2021). Once the report is received, I would highlight unfavorable results and start investigating the root causes. Since the materials quantity variance is unfavorable, I’d expect an explanation from the production manager or purchasing manager. The production manager could give feedback because extra materials used could be the result of poor supervision, untrained workers, inferior materials, or faulty machines. If inferior materials were purchased at a lower rate, it could increase the amount of waste and the purchasing manager would be held accountable for the unfavorable variance. I’d address the production managers for the labor rate variance and labor efficiency variance because they’re in charge of all manual labor. If the unfavorable variances are due to faulty materials, the purchasing manager could be at fault. However, most labor discrepancies come from poorly trained or unmotivated workers.