Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 104

Rank the importance of eight variances Assume that you are the production manager of a small branch plant of a large manufacturing firm. The central accounting control department sends you monthly performance reports showing the flexed budget amount, actual cost and variances for raw materials, direct labor, variable overhead (which is expressed on a direct labor hour basis), and fixed overhead. The variable cost budget variances are separated into quantity and cost per unit of input variances, and the fixed overhead budget and volume variances are shown. All variances are expressed in dollars.

Required:

a Rank the eight variances in descending order of their  usefulness to you for planning and controlling purposes. Explain your ranking.

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b.  Given the usefulness ranking in part a, explain how the frequency of reporting and the units in which each variance is reported might make the performance reports more useful.

Step 1 of 2

a) For planning and controlling objective, the ranking of eight important variances into their descending order of usefulness is as follows:

Table 1: Ranking of significant variances (Descending order ranking)

Variances of elements	Rankings
Raw material usage	1
Direct labor efficiency	2
Raw material price	3
Direct labor rate	4
Variable overhead efficiency	5
Variable overhead spending	6
Fixed overhead budget	7
Fixed overhead volume	8

Explanation of ranking: Supervisors and managers can control the variances of the raw material usage and the direct labor efficiency within the current period. Usually the two variances of raw material cost and direct labor rate are less controllable in the short-run period. The materials price tends to be more easily to control as compared to direct labor rate at hourly basis because labor contracts are generally negotiated for periods of one or more years, but raw material prices vary frequently. Next is variable overhead efficiency variance, this element could be controlled by controlling the direct labor rate, as usually the standard is based on the per hour direct labor rate. In most conditions, the variances of variable overhead spending and the fixed overhead volume are not convenient to control in the short-run period.