Question

Investigating Variances. Robotsy, Inc., produces robots sold at a variety of retail stores throughout the world. Standard cost information for each robot is presented as follows:

Direct materials	$60.00
Direct labor	40.00
Variable overhead	30.00
Total	$130.00

Robotsy produced and sold 100,000 robots for the year and encountered the following production variances:

Direct materials price variance	(300,000)	Favorable
Direct materials quantity variance	290,000	Unfavorable
Direct labor rate variance	(170,000)	Favorable
Direct labor efficiency variance	(140,000)	Favorable
Variable overhead spending variance	150,000	Unfavorable
Variable overhead efficiency variance	(210,000)	Favorable
Total variable production cost variance	(380,000)	Favorable

Company policy is to investigate all unfavorable variances above 5 percent of the flexible budget amount for direct materials, direct labor, and variable overhead.

1. Identify the variances that should be investigated according to company policy. Show calculations to support your answer.
2. What recommendations would you make for the company’s current policy?
3. Identify the highest favorable variance and highest unfavorable variance and provide one possible cause of each variance.
4. Victoria Posey, the manager at Robtsy, Inc., reviewed the company’s variance analysis report. The materials price variance of $(300,000) was the most significant favorable variance for the month, and the materials quantity variance of $290,000 was the most significant unfavorable variance. Victoria would like to reward the company’s purchasing agent for achieving such substantial savings by giving him a $2,000 bonus while not providing any bonus for the production manager.

• Do you agree with Victoria’s approach to awarding bonuses? Explain.
• What circumstances might lead to the conclusion that the purchasing agent should not receive a bonus?

Answer 1