What are the two possible sources of information a company might use to compute
ID: 2460097 • Letter: W
Question
What are the two possible sources of information a company might use to compute the budgeted amount in variance analysis? Why might managers find a flexible-budget analysis more informative than a static-budget analysis? Describe three reasons for an unfavorable direct manufacturing labor efficiency variance. How does variance analysis help in continuous improvement? Why might an analyst examining variances in the production area look beyond that business function for explanations of those variances?
Explanation / Answer
Answer:
Two possible sources of information a company might use to compute the budgeted amount in variance analysis are-
1. Last year/period actual amount.
2. Budget of another company in same industry.
Flexible budget provides information at various levels of production while static- budget provides budget only at one level. Future period volume may vary due to certain factors such as demand, economic environment etc. It would be useful for managers to have a budget at different level of production and flexible budget fulfills that purpose.
Three reasons for an unfavorable direct manufacturing labor efficiency variance:
1. Increase in idle time.
2. Change in production process.
3. Strikes and Lockouts by labor.
Once variance analysis is done, reason can be found of those variances. Managers work on those reasons to try to get it resolved so that this reason might not be in next variances. This lead to continuous improvement in process and in organization as whole.
Below are factors which an analyst examining variances in the production area look beyond that business function for explanations of those variances.
1. Rate of material and labor.
2. Demand of produced goods/labor/materials.
3. Production budget of another company in same industry.
4. Economic environment of industry.
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