Variance Analysis

Variance analysis allows companies to understand notable changes in the expected cost of each product. The actual cost to produce each product is compared with to the standard cost for each product. The difference between these costs represents the variance. A high variance indicates that the company’s performance is quite different than expected and requires additional research of this deviation.

The advantages of Variance analysis include Performance management, responsibility accounting and management by exemption.

But in reality, if these numbers are not looked into more closely to determine the actual cause of variance, it may backfire and lead to further profitability issues for the company. For example if material price variance and material usage variance is quite high, it indicates that materials were bought for less and usage was more than standard. The initial

Reaction to these numbers may be that the buyers did a praise worthy job while the manager did a poor job due to the large consumption. In reality, the reasons for this variance could have been different. It could be that the purchasing department bought inferior goods that led to higher consumption of materials. This may eventually lead to a defective final product and loss of reputation for the company.

Jackson Sound:

The CEO of Jackson Sound is concerned about the excess in-process inventory. His assistant, Megan, replied to his concern by pointing out that the real problem could be tied to the process improvement and that the bonuses are tied to standard cost performance.

In this situation a process improvement has led to less labor requirements and lower standard labor hours per unit. If, Jackson Sound does not fire the workers or increase output, it results in an unfavorable labor efficiency variance.

Since Jackson Sound implemented process improvement, which resulted in much shorter production times, it resulted in reduction of labor hours from 12.5 to 10.4 standard hours for the model LE7 amplifier. Jackson Sound should not produce more units than required, however, if they do not fire workers, they will have an unfavorable labor efficiency variance, if they decrease production. Therefore, if efficiency is measured in terms of labor efficiency variance, it would end up in over production. Due to over production, the company has made an investment in excess work-in-process inventory with a negative impact on shareholder value.

9-1 Ethical Decision Making

Spencer