Written Case Analysis

Background:

Beta Company is a manufacturing company that produces two products, A and B.

Problem Statement:

To compute the actual cost of each product, compare the result to the standard and

interpret the same using variance analysis.

Answers and Interpretation:

|1 |Material Price Variance (Material X)= |$23,400.00 |F |Material X |$14,400.00 |
| |Material Price Variance (Material Y)= |-$2,200.00 |UF | | |
| |Material Usage Variance (Material X)= | (9,000) |UF |Material Y |$1,600.00 |
| |Material Usage Variance (Material Y)= |$3,800.00 |F | | |

The above Material Price Variance for Material X tells us that materials were acquired

at a lesser cost while for Material Y the company paid more than the standard cost.

Initially, these indicate good performance by purchasing department since the net

price variance for both Material X and Y is still positive. For material usage, the

company used material X more than what was budgeted which is possibly due to

increased wastage of low quality materials. In this case, since

the net material cost variance is positive, it could mean they performed better than

their standard.

Given the above results, a positive price variance but a negative usage variance could

mean purchasing materials at a lesser amount but of low quality. Therefore, it is really

important to investigate material cost by analyzing Material Price Variance together

with Material Usage Variance.

|2 |Labor Rate Variance= | |$1,012.50 |F |
| |Labor Efficiency Variance= |$270.00 |F |
| |Total Labor Cost Variance= |$1,282.50 |F |

Beta Company shows a positive variance for both labor rate and efficiency which can

be interpreted as good performance. The company was able to produce more outputs

for a lesser pay to the workers. This could mean that they employed experienced

workers producing better outputs for a lower pay or minimal overtime.

In analyzing labor variances, both rate and efficiency variances must be given

attention. This is to avoid positive rate variance by employing unskilled workers

(means lesser pay) but increasing unfavorable labor efficiency due to poor

performance.

|3 |MPV (Material X)= remains unchanged (same as in No. 1) |
| |MPV (Material Y)= remains unchanged (same as in No. 1) |
| |MUV (Material X)= | 15,000 |F |still to be verified | |
| |MUV (Material Y)= | 9,500 |F |still to be verified | |

Labor Rate Variance= remains unchanged (same with No. 1)
Labor Efficiency Variance=1949.99994 F still to be verified

The deviation of planned production from actual does not affect the price and rate

variances.

Only the material usage and labor efficiency are changed as a result of the difference

of the quantity of resources used (materials qty and labor hrs).

In the above illustration, product x has a favorable price variance and a favorable

usage variance. This means that the company purchase the materials at a lesser price

but of good quality. Meanwhile, product y has a unfavorable price variance but has a

favorable usage variance. In product y the company pay more with greater results

also. Base on the computation above it simply says that purchasing at a lesser cost

might not always mean that the material is of less quality. Maybe the purchaser has

made a good canvass and bought the materials at a low price but of the same quality

that of product y. In general both x & y yield positive results.

4. No changes (same as in No. 1 and 2)

Actual sales does not affect the cost of production, thus computation for material and labor

variance remains the same.