While looking at budgeting this week, we encountered numerous forms of variances

Question

While looking at budgeting this week, we encountered numerous forms of variances (the difference between a standard and the actual cost). We read how variances can be favorable (the company makes money) or unfavorable. Sometimes, a favorable variance leads to an unintended negative consequence (such as when a burger joint uses less meat in its patties, which causes dissatisfied customers who fail to return to the restaurant). Now you come up with an example of variances. Think of a company that is manufacturing a product. What kind of materials are required? What is the standard for employee productivity? What are the alternatives for cheaper materials and labor? Provide enough information in your example so that your peers can answer the following questions:

1,.What is the quantity standard and the price standard in your peer’s example?

anwser in few words

Explanation / Answer

Answer:-

Manufacturin product company example is low to medium cost price point smart phones selling in Asian and African markets.

Here the said market segment is stating to have good quality of display, sound and good battery life with certain warranty of one year on product. This is standard favourable reason of consumer purchase at lower smart phone market segment. Due to the warranty and low cost consumer is attracted to the product and purchases it. The cost is 30-45% less than standard smart phones. Now, the variance clicks in when consumer finds the product is non functional due to some technical problem may be due to display, sound or more battery recharge per day. The service provider is not ready to replace it as warranty period is over and consumer cannot continue with product due to technical issue. Now, the consumer either has to live with or buy same low end smart phone or opt for higher end smart phone. In this whole process, consumer is paying double the price to have a smart phone in span of 18 months or so. If the consumer had initially purchased higher smart phone than the life would be typically 30 months to 45 months and in reality could save much on cost.

The root cause of the issue is the low to medium end smart phone companies first develop a euphemism around their product and associated service by having good quality product and service thereby generating 10-15 percent premium price from the actual market value of product. As they grow and acquire more market share, they tend to include low quality material in their product that only satisfy their warranty or legal bounded period. Also, they employ low cost labor for labor intensive process which could be driven by machine. Also, they anticipate consumer under euphemism may buy their same product post warranty period thereby lucky in pushing two products to one consumer in a span of 12-18 months. But in reality, this companies have very short life of less than a decade. They earn initially 2-4 years but they dies down due deployment of low quality material in their product and using low quality labor for sensitive product manufacturing process instead of machine usage.

The alternative to cheaper material is usage of standard materials that are having good product life, less hazardous, meeting international standard quality norms, favouring global environmental policies and procedures during disgarding them or recycling them. Also, skilled labor need to be used in manufacturing process only where human intervention are requirement or human skills are required to be utilised. These forms quality standard and do cover the survival of low to medium cost product manufactures. These standard deployment and practice will increase price standards by 20% initially or will command zero premium during their product launch but in long run these companies would benefit. With actual implementation one could see these companies slowly coming to big league and is competitive to big league company.

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