Atlantic Lighting Systems’s master budget and the actual results for the most re

Question

Atlantic Lighting Systems’s master budget and the actual results for the most recent year of operating activity follow. Master Budget Actual Results Variances F or U Number of units 150,000 160,000 10,000 Sales revenue $33,000,000 $35,520,000 $2,520,000 F Variable manufacturing costs Materials (4,800,000) (5,300,000) (500,000) U Labor (4,200,000) (4,400,000) (200,000) U Overhead (2,100,000) (2,290,000) (190,000) U Variable selling, general, and admin. costs (5,250,000) (5,450,000) (200,000) U Contribution margin 16,650,000 18,080,000 1,430,000 F Fixed costs Manufacturing overhead (7,830,000) (7,751,000) 79,000 F Sellings, general, and admin. costs (6,980,000) (7,015,000) (35,000) U Net income $ 1,840,000 $ 3,314,000 $1,474,000

Why is it important to investigate both price (rate) and volume (efficiency)variances when rewarding employees for satisfactory work when performance evaluations are based on meeting budgets?

Explanation / Answer

It important to investigate both price (rate) and volume (efficiency) variances when rewarding employees for satisfactory work when performance evaluations are based on meeting budgets due to following reasons;

1. When employees are able to sell a product at a price more than standard price then no doubt company will get favorable results because revenue from sell will be more than expected. So if employees do it for company then they should be rewarded.

2. When employees are not able to sell a product at a price less than standard price then company will get unfavorable results because revenue from sell will be less than expected. So these employees must be identified and a proper training for those will be necessary for improving their sells skills otherwise company will get negative results on regular basis.

3. Efficiency variance also important because it measures how effectively employees uses company resources for getting fixed standard of production; for example if employees are able to produce decided units at low quantity compare to standard quantity then cost of production will be low and company will get more profits. So these employees must be rewarded.

4. If employees are not able to produce decided units at low quantity compare to standard quantity or at equal to standard quantity then cost of production will be higher and company will get suffer from losses. So in this case these employees must be identified and a proper training for those will be necessary for improving their producing skills otherwise company will get negative results on regular basis.

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