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CASE: – VARIANCE ANALYSIS PERFORMANCE EVALUATION
Envision yourself being the controller of Company Z.
Company Z’s Production consistently shows highly unfavorable efficiency variances for direct materials and direct labor. For the same periods, Z’s Purchasing Department shows highly favorable price variances for direct materials and direct labor.
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1. On the basis of these variances, would you conclude, without further investigation, that the Purchasing Department is performing well and should be rewarded, and that the Production Department falls short of it efficiency standards and its operations need to be re-configured?
2. Could there be other reasons than superior performance of the Purchasing Department and inadequate performance for the Production Department that might explain the price and efficiency variances for the direct costs of the departments? If so, please explain what these other reasons could be.
3. Could the above variances also hide the possibility of inadequate performance of the Purchasing Department and Superior Performance of the Production Department? Could you outline such scenarios?
4. As the controller, what steps you would take to acquire more information to analyze the variances described above, identify their causes, and decide on actions required to rectify any faults?