Units Inventory, January 1... Production.... Sales .... Inventory, September 30. 2,400 2,000 400
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Incentives Created by Absorption Costing; Ethics and the Manager
Carlos Cavalas, the manager of Echo Products’ Brazilian Division, is trying to set the production schedule for the last quarter of the year. The Brazilian Division had planned to sell 3,600 units during the year, but by September 30 only the following activity had been reported:
The division can rent warehouse space to store up to 1,000 units. The minimum inventory level that the division should carry is 50 units. Mr. Cavalas is aware that production must be at least 200 units per quarter in order to retain a nucleus of key employees. Maximum production capacity is 1,500 units per quarter.
Demand has been soft, and the sales
Required:
1. Assume that the division is using variable costing. How many units should be scheduled for production during the last quarter of the year? (The basic formula for computing the required production for the quarter is: Required production = Expected sales + Desired ending inventory - Beginning inventory.) Show computations and explain your answer. Will the number of units scheduled for production affect the division’s reported income or loss for the year? Explain.
2. Assume that the division is using absorption costing and that the divisional manager is given an annual bonus based on divisional operating income. If Mr. Cavalas wants to maximize his division’s operating income for the year, how many units should be scheduled for production during the last quarter? [Sec the formula in (1) above.] Explain.
3. Identify the ethical issues involved in the decision Mr. Cavalas must make about the level of production for the last quarter of the year.
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