Question

As a door manufacturer, you have noticed a 10% variance in purchase cost of door hinges. After discussing with the purchase department, it is concluded that there is has been a short supply of door hinges duet to a new design. What could you do to reduce or eliminate the possible variance for the next period?

Answer 1

A variance is a measure of difference of budgeted and actual data. It ia a cost control tool for the management to control the cost. In the given case the consumption of the door hinges increased ten percent cause of change in the design of the doors and problem is how to reduce or eliminate the increases cost of hinges for the next period.

So, it may be possible that by the change in design in doors due to that the consumption of hinges increased may be beneficial for the business to increase the sales of the doors and also the sales price of the doors so business may recover the incremental cost of hinges from the incremental sales price and in other scenario it may be possible that the increment in consumption in hinges may bring down the consumption of other consumables in course of manufacturing of doors so the business an recover the increase consumption of the door hinges form the decreased consumption of other consumables and one other scenario it could also be possible that the increased consumption of door hinges will increase the direct cost of manufacturing of doors to the business but will decrease cost of after sale services and warranties to the business because of incremental performance level of the product.

So, the business has to decide in what way they want to do the variance positive, in direct course if business wants to decrease the variance, the business should approach new suppliers to procure the hinges at reduced cost so the variance could decrease in other way the technical team may report the analysis that the business could compromise in the quality of hinges in some proportion because the number of hinges are being used per door so the total cost of hinges will be come down and the variance in purchase cost of hinges will come down in next period for the business.

So as we discussed, the business, should analyze the needs and ways to bring down the variance and after that should apply the direct or indirect measures to do the variance positive or reduced for the next period as discussed in our above description.

So above is the answer to the case given.