Wildcat Pizza, Inc. produces batches of frozen pizzas to sell at a variety of grocery stores throughout the country. Standard cost information for each batch is presented as follows: Direct materials $60.00 Direct labor 40.00 Variable overhead 30.00 Total $130.00 Wildcat produced and sold 100,000 batches for the year and encountered the following production variances: Direct materials price variance (300,000) Favorable Direct materials quantity variance 290,000 Unfavorable Direct labor rate variance (170,000) Favorable Direct labor efficiency variance (140,000) Favorable Variable overhead spending variance 150,000 Unfavorable Variable overhead efficiency variance (210,000) Favorable Total variable production cost variance (380,000) Favorable Company policy is to investigate all unfavorable variances above 5 percent of the flexible budget amount for direct materials, direct labor, and variable overhead. Identify the variances that should be investigated according to company policy. Show calculations to support your answer. What recommendations would you make for the company’s current policy? Identify the highest favorable variance and highest unfavorable variance and provide one possible cause of each variance. Sarah Longmeadow, the owner of Wildcat Pizza, reviewed the company’s variance analysis report. The materials price variance of $(300,000) was the most significant favorable variance for the month, and the materials quantity variance of $290,000 was the most significant unfavorable variance. Sarah would like to reward the company’s purchasing agent for achieving such substantial savings by giving her a $2,000 bonus while not providing any bonus for the production manager. Do you agree with Sarah’s approach to awarding bonuses? Explain. What circumstances might lead to the conclusion that the purchasing agent should not receive a bonus?
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.
Wildcat Pizza, Inc. produces batches of frozen pizzas to sell at a variety of grocery stores throughout the country.
|
Direct materials |
$60.00 |
|
Direct labor |
40.00 |
|
Variable |
30.00 |
|
Total |
$130.00 |
Wildcat produced and sold 100,000 batches for the year and encountered the following production variances:
|
Direct materials price variance |
(300,000) |
Favorable |
|
Direct materials quantity variance |
290,000 |
Unfavorable |
|
Direct labor rate variance |
(170,000) |
Favorable |
|
Direct labor efficiency variance |
(140,000) |
Favorable |
|
Variable overhead spending variance |
150,000 |
Unfavorable |
|
Variable overhead efficiency variance |
(210,000) |
Favorable |
|
Total variable production cost variance |
(380,000) |
Favorable |
Company policy is to investigate all unfavorable variances above 5 percent of the flexible budget amount for direct materials, direct labor, and variable overhead.
- Identify the variances that should be investigated according to company policy. Show calculations to support your answer.
- What recommendations would you make for the company’s current policy?
- Identify the highest favorable variance and highest unfavorable variance and provide one possible cause of each variance.
- Sarah Longmeadow, the owner of Wildcat Pizza, reviewed the company’s
variance analysis report. The materials price variance of $(300,000) was the most significant favorable variance for the month, and the materials quantity variance of $290,000 was the most significant unfavorable variance. Sarah would like to reward the company’s purchasing agent for achieving such substantial savings by giving her a $2,000 bonus while not providing any bonus for the production manager.
- Do you agree with Sarah’s approach to awarding bonuses? Explain.
- What circumstances might lead to the conclusion that the purchasing agent should not receive a bonus?
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