Chapter 23, Problem 23.23.5CP

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	Budgeted Variable Factory Overhead at Actual Production	Controllable Variance
Supplies	$ 42,000	$ 39,780	S 2,220 U
Power and light	52,500	50,900	1,600 U
Indirect factory wages	39,100	30,600	8,500 U
Total	$133,600	$121,280	$12,320 U

 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 operation. I’m not very pleased with these figures. Before these numbers go to headquarters, you and I 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 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. I’m being penalized for costs I have no control over. 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 team player. 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?