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Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
ISBN: 9781285866307

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BuyFindarrow_forward

Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
ISBN: 9781285866307
Textbook Problem

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:

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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?

To determine

Variable factory overhead controllable variances:

The difference between the actual variable overhead costs, and the standard variable overhead costs for actual production is known as the variable factory overhead controllable variances. The variable factory overhead controllable variance is computed as follows:

Variable factory overheadcontrollable variance}(Actual variable factory overheadStandard variable factory overhead )

To respond: To the plant manager.

Explanation

  • The plant manager is very much worried about the controllable variance as it is very unfavorable, and hence, as a result, he is placing pressure on the controller. The claim is that these costs are not variable at all. But, this claim is not acceptable. As this company is a small one, it purchases its power, and light from outside. The bill of power and light is variable cost to the amount of energy used in the plant. The plant and light, and the supplies are related to the number of units produced. There is no problem with these costs. However, the problem is with the indirect factory wages.
  • The indirect wages are not completely variable. Here, the variance of the indirect factory wages is $8,500 higher than the standard...

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