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954 Part 6 Control in a Management Accounting System
CAUTION
the standard quantity of inputs allowed for actual output. The important concept is quantity
allowed for actual output. This concept refers to the quantity of materials that should
have been used to produce the actual output and relates back to the principle of flexible
budgeting that we discussed in the expanded material section of Chapter 18. Simply put,
Sunbird management must wait until the end of the year to determine how many feet of
wood it should have used during the year. At the end of the year, the accountant for
Sunbird Boat Company will multiply the standard quantity of materials per boat by the
actual volume of boats produced to determine the standard quantity allowed or:
Standard quantity per unit Actual units produced = Standard quantity allowed
As you can see in the illustration on the previous
page, when the actual quantity used is the
basis for the materials price variance, the materials
price variance and the materials quantity
variance share some of the same computations,
making these calculations somewhat easier.
However, remember that basing the materials
price variance on the actual quantity used will
delay the recognition of price problems from
the time that the materials are purchased until
the time they are transferred to production.
FYI
This number is then compared to the actual
quantity of wood used to determine if there
is a favorable or unfavorable quantity variance
for materials. The accountant will multiply
this variance by the standard price for
wood in order to account for this variance
in Sunbird’s accounting system (which we
discuss later in this section).
In the fast-food arena, for example, franchises,
such as McDonald’s and Baskin-Robbins,
have standard quantities for meat in hamburgers,
ice cream in cones, and the amount of
time it should take to serve a customer.
Controlling Materials Variances
Materials price variances are usually under
the control of the purchasing department.
The purchasing function involves getting a
variety of price quotations, buying in economic
lot sizes to take advantage of quantity
discounts, paying on a timely basis to obtain
cash discounts, and evaluating alternative forms of delivery to minimize shipping costs.
Some of these factors will be less important when there are few suppliers or when purchase
contracts with suppliers are for long periods. In any case, the existence of unfavorable
price variances may suggest a problem that needs correcting. On the other hand,
favorable price variances may also indicate that there is a problem in the purchasing
process, such as the purchase of lower quality materials or purchasing too much material
in order to get a larger bulk discount.
The buyer responsible for purchases should be able to explain any variance from standard
price even though the buyer may not be able to control its occurrence. This may be
the case, for example, when market prices change after the standard is set, which could
be the explanation for the favorable price variance. Or materials may be damaged, requiring
the reorder of a small quantity on a rush basis; this usually raises the price of the materials
as well as the cost of shipping, causing an unfavorable price variance. The point is that the
cause of any significant variance (whether favorable or unfavorable) must be explained and
steps taken to avoid such variances in the future. The purpose of variance analysis is not to
browbeat employees for failing to meet impossible expectations, but rather to provide information
that will help management identify ways of improving the production process.
Materials quantity variances may be caused by quality defects, poor workmanship,
poor choice of materials, inexperienced workers, machines that need repair, or an inaccurate
materials quantity standard. Just as the purchasing manager must explain significant
price variances, generally the
production manager must analyze significant
quantity variances to determine their
cause. If the material is of inferior quality,
the purchasing manager, rather than the
production manager, may be responsible
for the variance. Again, the point is that the
cause of the variance must be determined;
only then can it be decided what action, if