Chapter 22, Problem 22.4CP

Variance interpretation

Vanadium Audio Inc. is a small manufacturer of electronic musical Instruments. The plant manager received the following variable factory overhead report for the period:

Actual units produced: 15,000 (90% of practical capacity)

The plant manager is not pleased with the $12,320 unfavorable variable factory overhead controllable variance and has come to discuss the matter with the controller. The following discussion occurred;

Plant Manager: I just received this factory report for the latest month of operator. I'm not very pleased with these figures. Before these numbers go to headquarters, you and I will need to reach an understanding.

Controller Go ahead, what's the problem?

Plant Manager: What's the problem? Well, everything. Look at the variance. It’s too large. If I understand the accounting approach being used here, you are assuming that my costs are variable to the units produced. Thus, as the production volume declines, so should these costs. Well I don't believe that these costs are variable at all. I think they are fixed costs. As a result when we operate below capacity, the costs really don't go down at all. I'm being penalized for costs I have no control over at all I need this report to be redone to reflect this fact, if anything, the difference between actual and budget is essentially a volume variance. Listen. I know that you're a tear-payer. You really need to reconsider your assumptions on this one.

If you were in the controller’s position, how would you respond to the plant manager?