Vanadium Audio Inc. is a small manufacturer of electronic musical instruments. T
ID: 2570458 • Letter: V
Question
Vanadium Audio Inc. is a small manufacturer of electronic musical instruments. The plant manager received the following variable factory overhead report for the period: Budgeted Variable Factory Overhead at Actual Production Controllable Supplies Power and light Indirect factory wages Total Actual 42,000 52,500 39,100 $133,600 39,780 50,900 30,600 $121.280 Variance s 2,220U 1,600 U 8,500 U $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'nm not very pleased with these figures. Before these numbers go to headquarters, you and I will 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 tha my costs are variable to the units produced. Thus, as the production volume declines so should these costs. Well, I don't believe that these costs are variable at all. I think they are fixed costs. As a result, when we operate below capacity, the costs really do go down at all. I'm being penalized for costs I have no control over at all. 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. Yo 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?Explanation / Answer
The intention of the plant manager is that costs of supplies, power and light and indirect factory wages are not variable but are actually fixed costs, which do not change in chance in production volume. If the argument made by the plant manager is to be considered as correct, then the budget of essentials should be based on the assumption that these are variable costs and thus budget is prepared in proportion to the possible capacity, in which case, there's bound to be a positive variance and the actual will be more than the budget, if the actual are fixed cost. Therefore the argument made by the plant manager is relevant, only if the assumption made by the controller about these costs being variable is incorrect.
Therefore, having a closer look at the nature of these costs, it is obvious that if the plant is working at 90% limit, at that point it is conceivable to chop down the factored wages, power and light and supplies, on the grounds that the plant is working less number of hours. These expenses are caused on a hourly premise. I would persuade the plant administrator that these expenses are time variable and ought to be dealt with in that manager. Moves should be made by the plant manager to chop down these expenses, by turning off unused power, diminishing supplies and circuitous processing plant compensation in extent to the limit that the plant works. I would likewise express that the report would not be changed, as the numbers are on real premise.
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