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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?

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 23, Problem 23.23.5CP
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?

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Chapter 23 Solutions

Accounting
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