CP 22-3 variance interpretation You have been asked to investigate some cost pro

Question

CP 22-3 variance interpretation You have been asked to investigate some cost problems in the Assembly Department of Ru thenium 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 E ectronics Cor- Assem bly Department Quarterly Budget Performance Report Standard Actual Quantity at Standard Quantity Standard Rates Rates Direct labor $157,500 70,000 U Direct materials 87500 U 297,500 $157 S00 U 55.000 The following reports were also obtained Ruthenium Electronics Co.-Pu rchasing Department Quarterly Budget Performance Report Actual Quan at Quantity at Variance Actu -552,500 F $437,500 Direct materials Ruthenium Electronics Co. Fabricat on Department Performance Report Quantity at Quantity at Variances Standard Rates -$42,000 F $203 000 140,000 Direct materials -S42.000 F $343,000 Total You also interviewed the Assembly Department supervisor. Excerpts from the interview follow Q: What explains the poor performance in your department? isten, you've got to understand what it's been like in this department recently. Lately, seems no matter how hard we try, we can't seem tomake the rm not sure what is going on but weve been having a lot of o what kind of problems? At well for instance, al this quarter we've been rom the and the parts just didn't fit together very well rm not sure what is going on, but during most of ths quarter and had to scrap and sort parts ust to get eur assemblies put together, Naturally, al this takes time material, And that's not al Go on. Au dis quarter, the work that wewn receiving formthe maybe stuff that comes Fabrication can't be assembled. The fabrication sal wrong As a around 20% of the in form Naturaly, ths has just shot our quantity variances. had to and tewarkalot of the stuff. Interpret the variance reports inlight ofthecomments by the Assembly Department supervisor.

Explanation / Answer

Let us examine the results department wise, first we will analyze the purchasing department

There is favorable variance of $52,500 means the per unit actual rate is less than standard rate for the actual quantity purchased , which shows actual price is 12% less than standard

Let us analyze the assembly department

There is an unfavorable variance of direct labor of $ 70,000 means direct labor hours used is 44% morethan standard hours for each unit produced , which means standards have to be re-examined for direct labor hours for manufacture of each unit or to redesign the manufacturing layout or increase the productivity of the labor by re-skilling and providing training initiatives

There is an unfavorable variance of direct material used by $87,500 means the direct material used is 29% more than standard provided. The reasons of high usage of direct material can be loss/bad quality of material used (due to low actual price than standard price as seen in purchase department) or wastage is high among process in assembly. the study of these factors will give reasons for any changes in standard qty

Let us analyze the fabrication department              

The direct labor used is favorable by $42,000 means the actual direct labor hours are 17%less than standardit can be due to more productivity in fabrication department

The material used has no variance

This means fabrication department is doing well, there is need for analysis for variance in assembly department and corrective action has to be taken

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