Variances Flashcards
CEO is surprised that materials cost less than expected since there was inflation during the year. He has thus proposed to give the purchasing manager a bonus for a job well done in a difficult environment. As management consultant provide your advice to the CEO.
The materials that cost less were probably of poorer quality. This can be seen by looking at the other variances.
Do not give the bonus. The price variance on materials is easy to achieve if we look at this in isolation. There are many consequences both short term and long term from reducing quality of inputs.
The poor quality may only show up years down the road and this will cause a significant warranty cost.
The CEO has also proposed that the personnel manager should be fired as labor costs were greater than expected and since he knows that there was no union wage increase during the year. As management consultant provide your advice to the CEO
Labor costs were greater. Even with no wage inflation there is the possibility that the poor quality inputs caused more labor time as evidenced by the Labor efficiency variance and this could easily have caused the need for overtime hours.
The personnel manager probably does not control the efficiency of the workers as much as the quality of the inputs do.
The personnel manager wants to get a bonus because he was able to get new workers who only cost $25 per hour. “I saved $5 per hour or $10 per unit, which is significant when you multiply that by #1,000 sheets!” Thoughtfully respond to the personnel manager and conclude whether a bonus is justified or not
No bonus, the labour usage length increased
labor rate variance Favourable
Hiring of more unskilled or semi-skilled labor (this may adversely impact labor efficiency variance).
Labor efficiency usage Favourable
Hiring of more higher skilled labor (this may adversely impact labor rate variance)
