BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

Solutions

Chapter
Section
BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
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:

  Actual Budgeted Variable Factory Overhead at Actual Production Controllable Variance
Supplies $ 42,000 $ 39,780 S 2,220 U
Power and light 52,500 50,900 1,600 U
Indirect factory wages 39,100 30,600 8,500 U
Total $133,600 $121,280 $12,320 U

 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 operation. I’m not very pleased with these figures. Before these numbers go to headquarters, you and I 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 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. I’m being penalized for costs I have no control over. 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 team player. 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...

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

Show that if A1, A2, and A3 are independent events, then P(A1 | A2 A3) 5 P(A1).

Probability and Statistics for Engineering and the Sciences

How does employee participation increase motivation?

Foundations of Business (MindTap Course List)

Are upfront payments considered separate performance obligations?

Intermediate Accounting: Reporting And Analysis

Define the term marketing

MKTG 12:STUDENT ED.-TEXT

Describe the transactions recorded in the following T accounts:

College Accounting (Book Only): A Career Approach

PREFERRED STOCK RATE OF RETURN What will be the nominal rate of return on a perpetual preferred stock with a 10...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)