Question

For each of the following brief scenarios, indicate whether the HIGHEST ranking supervisor (in the scenario) acted in an appropriate manner and give reasons as to why or why not.

1. The Vice-President of Manufacturing notices that the manager of the Assembly Department has had an unfavorable direct labor variance of $40 to $80 for each of the past six months. The budgeted amount for direct labor in the Assembly Department each month is $50,000. The VP of Manufacturing assigns an administrative assistant from the VP's office to spend a full month on the Assembly Department work floor to try and discover the underlying cause of the variance.

2.. A Vice-President of Manufacturing has recently fired the Department Supervisor for the Mixing Department for having a $15,000 unfavorable variance on the budget line item that deals with fixed factory overhead for the Mixing Department. The dismissed department supervisor attempted to explain that $12,667 of the $15,000 unfavorable variance was due to a recent property tax that went into effect on factory equipment used to mix environmentally sensitive materials, but to no avail.

3. For an annual budget review, the manager of a hospital's x-ray department went into the meeting feeling quite confident. All of the x-ray department's variances were favorable except for a minor unfavorable variance for materials that had been caused by a machine malfunction resulting in some ruined x-ray film. During the review, the manager's supervisor ignored the favorable variances and spent the entire time focusing on the unfavorable variance.

Answer 1

1.

The budgeted amount of Direct Labour for each month is $50,000

Monthly unfavourable variance for each month ranges from $40 to $80 for last six months. This amounts to 0.08 to 0.16 percent of the budgeted amount. It is immaterial or insignificant amount.

Now the question arises. Is it worth to investigate?. No is the answer.

Some difference between budgeted and actual will always occur. These differences may be favourable or unfavourable and in addition to regular and controllable factors, random factors may also contribute for these differences. If every variance is to be investigated, management would waste a great amount of time and resources in tracking down reasons for irrelevant differences.

In the present case, size of the variance is very small. The action of Vice President, Manufacturing in deputing his office administrative assistant for a full month to investigate this very insignificant variance is inappropriate. It is waste of time and resources.

Instead, he should discuss with Assembly manager and find the ways from Assembly manager's perspective of turning these variances into favourable ones.

2.

It is not mentioned the budgeted amount of fixed overheads in order to find out the variance is substantial or not.

Let us assume that variance of $15,000 is significant. If the property tax of $12,267 is the major contributor of this variance is true and is not estimated before in the fixed overhead budgets, the supervisor is not at fault. Moreover, property tax is a statutory obligation and is not in the control of Supervisor. The remaining amount of $2,333 may not be of that much significant. Also, it is not mentioned that the unfavourable variance is continuing.

In this backdrop, the best option for the Vice President is to look into actual picture, verify the claims of Supervisor and finding the reasons for variance. Dismissal of Supervisor may be  inappropriate.

3.

The behviour of the Manager's supervisor is inappropriate.

Discussing Unfavourable variance in the annual budget review is not wrong. But spending most of the time on unfavourable minor variance which is due to the genuine and identifiable factors and ignoring favourable variance is not appropriate.

Avoiding discussion on favourable variances will result into:

• Decreased morale of the employees
• Missing the chance of discussion for ways to further improve favourable variances.