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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Variance interpretation

 You have been asked to investigate some cost problems in the Assembly Department of Ruthenium Electronics Co., a consumer electronics company. To begin your investigation, you have obtained the following budget performance report for the department for the last quarter.

Ruthenium Electronics Co.—Assembly Department Quarterly Budget Performance Report
  Standard Quantity at Standard Rates Actual Quantity at Standard Rates Quantity Variances
Direct labor $157,500 $227,500 $ 70,000 U
Direct materials 297,500 385,000 87,500 U
Total $455,000 $612,500 $157,500 U

 You also obtained the following reports:

Ruthenium Electronics Co.—Purchasing Department Quarterly Budget Performance Report
  Actual Quantity at Standard Rates Actual Quantity at Actual Rates Price Variance
Direct materials $437,500 $385,000 $(52,500) F
Ruthenium Electronics Co.—Fabrication Department Quarterly Budget Performance Report
  Standard Quantity at Standard Rates Actual Quantity at Standard Rates Quantity Variances
Direct labor $245,000 $203,000 $(42,000) F
Direct materials 140,000 140,000 0
Total $385,000 $343,000 $(42,000) F

 You also interviewed the Assembly Department supervisor. Excerpts from the interview follow:

 Q: What explains the poor performance in your department?

 A: Listen, you’ve got to understand what it’s been like in this department recently. Lately, it seems no matter how hard we try, we can’t seem to make the standards. I’m not sure what is going on, but we’ve been having a lot of problems lately.

 Q: What kind of problems?

 A: Well, for instance, all this Quarter we’ve been requisitioning purchased parts from the material storeroom, and the parts just didn’t fit together very well. I’m not sure what is going on, but during most of this quarter, we’ve had to scrap and sort purchased parts—just to get our assemblies put together. Naturally, all this takes time and material. And that’s not all.

 Q: Go on.

 A: All this Quarter the work we've been receiving from the Fabrication Department has been shoddy. I mean, maybe around 20% of the stuff that comes in from Fabrication just can’t be assembled. The fabrication is all wrong. As a result we've had to scrap and rework a lot of the stuff. Naturally, this has just shot our quantity variances.

 Interpret the variance reports in light of the comments by the Assembly Department supervisor.

To determine

Direct labor time variance:

Direct labor time variance is the difference between actual direct labor hours, and the standard direct labor hours multiplied by standard rate per hour. When the actual direct labor hours exceeds the standard direct labor hours, the variance is unfavorable. Similarly, when the actual direct labor hour is less than the standard direct labor hour, the variance is favorable.

Direct materials price variances:

The difference between the actual price and the standard price multiplied by the actual quantity is known as direct material price variance. When the actual price exceeds the standard price, the variance is unfavorable. Similarly, when the actual price is less than the standard price, the variance is favorable.

To interpret:  The variance reports based on the comments by the assembly department supervisors.

Explanation

  • In this case, the counterproductive behavior happened outside the department may be due to the poor performance of the assembly department. It is a kind of classic problems with the variance analysis. Often, the variances reflect the causes outside of the responsibility center manager’s control. The assembly supervisor complaints, that from the fabrication department both the purchased parts and the incoming materials are giving trouble.

The performance report reveals the following the review:

  • The materials price variance is very favorable:

In this case, the purchase department is getting supplies from the low price suppliers. Thereby, the suppliers are giving low quality goods to the company for which the suppliers are actually paid for. Since the quality of the goods gone down it is difficult to make assembly for the assembly departments.

  • The labor time variance is also very favorable in the fabrication departments.

Here the fabrication department might be performing work faster than the standard...

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