Concept explainers
Variance interpretation
Vanadium Audio Inc. is a small manufacturer of electronic musical Instruments. The plant manager received the following variable factory overhead report for the period:
Actual units produced: 15,000 (90% of practical capacity)
The plant manager is not pleased with the $12,320 unfavorable variable factory overhead controllable variance and has come to discuss the matter with the controller. The following discussion occurred;
Plant Manager: I just received this factory report for the latest month of operator. I'm not very pleased with these figures. Before these numbers go to headquarters, you and I will need to reach an understanding.
Controller Go ahead, what's the problem?
Plant Manager: What's the problem? Well, everything. Look at the variance. It’s too large. If I understand the accounting approach being used here, you are assuming that my costs are variable to the units produced. Thus, as the production volume declines, so should these costs. Well I don't believe that these costs are variable at all. I think they are fixed costs. As a result when we operate below capacity, the costs really don't go down at all. I'm being penalized for costs I have no control over at all I need this report to be redone to reflect this fact, if anything, the difference between actual and budget is essentially a volume variance. Listen. I know that you're a tear-payer. You really need to reconsider your assumptions on this one.
If you were in the controller’s position, how would you respond to the plant manager?
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EBK FINANCIAL & MANAGERIAL ACCOUNTING
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