39. Mangament Work with Variance Analysis

Question 1

How can the variance framework be used whether an organization operates in the manufacturing, service, or merchandising industry?

Answer 1

Regardless of the industry an organization operates in, variances can be used to effectively manage the complexity of the organization. The variance framework computes signals that management should investigate to determine why actual costs are different than expected costs.

Question 2

Assuming revenue and cost standards are up to date, what are some factors to consider when investigating variances related to revenue?

Answer 2

• The marketing department is often responsible for evaluating the market and setting the price, but the sales department generates the sales volume based on price.
• Price and the volume of demand are not independent of each other in the market. The relationship between price and demand might move together or in opposite directions.
• Marketing and sales departments have more or less influence on the price and volume of demand.

Question 3

Which department is typically responsible for price variances and what are some internal and external factors that might cause these variances?

Answer 3

• The purchasing department is typically responsible for price variances.
• Internal factors may include decisions about the quantity and cash discounts available, quality of the materials, and the delivery method used.
• External factors may include rising or falling prices based on economic events or demands from another department that require the organization to expedite a purchase or delivery and therefore it is unlikely that the organization can obtain standard pricing

Question 4

Which department is typically responsible for price variances and what are some internal and external factors that might cause these variances?

Answer 4

• The production department is typically responsible for price variances.
• Internal factors may include experience, training, and motivation of the production crew, how well the equipment is maintained, or how well quality control processes are managed.
• External factors may include decisions made in other departments that can’t be controlled by the production department, like a decision by the purchasing department to purchase lower-quality materials, which could lead to an unfavorable usage variance.

Question 5

Causes for direct labor variances can be spread across multiple departments. What role do the human resource and production departments play in determining direct labor variances?

Answer 5

• The human resource department is responsible for finding, hiring, and initially training new employees. The HR department is responsible for achieving standard labor rates, which is impacted by the economy and demands of other departments.
• The production department plays a major role in the efficiency of labor because managers in this department are responsible for ongoing training and motivation of their team.

Question 6

What are some reasons that overhead variances require careful control and evaluation by management processes?

Answer 6

• Overhead is a compilation of many factors, so the process is complicated.
• In some organizations the overhead costs substantially exceed the combined cost of direct materials and direct labor.
• Many organizations with complicated overhead structures will expand their system for tracing overhead cost variances to include many different types, prices, and inputs of overhead.