Question

What do we do?

11 unread reply.11 reply.

Consider the following set of circumstances for a business:

Materials

SQ SP AQ SP AQ SP AQ AP

$1,500,000

$1,450,000

$1,375,000

$1,525,000

MPV = Unfavorable $150,000

MQV = Favorable $50,000

Labour

SQ SR AQ SR AQ AR

$2,650,000

$2,825,000

$3,100,000

LRV = Unfavorable $275,000

LEV = Unfavorable $175,000

An investigation needs to be performed to identify what occurred. Based on the thresholds for review, the materials price, labor rate, and labor efficiency variances are all in question. On investigation, it has been determined that the purchasing department employee bought higher quality materials than the specifications call for, but did not confirm the purchase with anyone nor notify anyone of the higher quality. All of the variances above resulted from this one purchasing decision.

1. Determine who would you talk to in order to figure out what caused the variances. Given that there are three variances to review, you must list at least three employee positions that you might question.
2. Provide at least one question for each of the three people that you listed above. The questions must differ from person to person. Create your questions to be specific for the role within the company that the person has.
3. Respond as to what you imagine might be done based on the questions they are proposing.

Just saying something is good, bad, or the like is insufficient. You must provide support for all assertions and valuations made.

Answer 1

An unfavorable direct-material price variance happens when a higher price was paid for the material when the standard was already set. Deviations between the actual and standard price, which are highlighted by the price variance, is due to the purchasing function in the firm. Action to follow up a significant price variance is facilitated by calculating variances as soon as possible after the material is purchased. The material price variance highlights deviations between the price of material actually used (AP) and the standard price set (SP).

Therefore, it has to considered to compute variances at the time the material is used in production.

The occurrence of variances is very common in industries.They occur for almost all cost elements and should not be used to trace or fire a particular department or employee.

Sometimes they may not be very notable and sometimes they may be due to external factors that are beyond the control of concerned responsible persons or managers. Variances are caluculations to control costs, improve efficiency and to be used in a way to motivate employees.

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