Pemberton Tiles Ltd: four variances that cancel out and hide the truth
Pemberton Tiles Ltd produces a single type of floor tile. The standard cost card for one square metre is material 3 kg at £8.00 per kg (£24.00) and direct labour 1.5 hours at £14.00 per hour (£21.00). The budget for last month was 4,000 square metres. Actual results were: production 4,200 square metres; material purchased and used 13,000 kg at a total cost of £101,400; direct labour 6,100 hours at a total cost of £88,450. The purchasing manager has reported a favourable material price variance and expects to be congratulated. The production manager has reported a favourable labour efficiency variance and argues that the small adverse total variances show the month was well controlled.
1. Calculate the material price and usage variances and the labour rate and efficiency variances for last month. Show the standard quantities and hours for actual output.
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Standard for actual output (4,200 m²): material 4,200 × 3 = 12,600 kg; labour 4,200 × 1.5 = 6,300 hours.
Material (actual price £101,400 ÷ 13,000 = £7.80/kg)
- Price: (7.80 − 8.00) × 13,000 = £2,600 favourable
- Usage: (13,000 − 12,600) × £8.00 = £3,200 adverse
- Net: £600 adverse (check: 12,600 × £8 = £100,800 vs £101,400 actual)
Labour (actual rate £88,450 ÷ 6,100 = £14.50/hr)
- Rate: (14.50 − 14.00) × 6,100 = £3,050 adverse
- Efficiency: (6,100 − 6,300) × £14.00 = £2,800 favourable
- Net: £250 adverse (check: 6,300 × £14 = £88,200 vs £88,450 actual)
Only £850 adverse in total, from £11,650 of gross variance in opposite directions.
2. Assess whether either manager's claim is justified, and explain what the pattern of variances suggests about the month.
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Purchasing manager: not justified on the evidence. The £2,600 price saving was bought with 400 kg of extra usage (£3,200 adverse). Net effect £600 adverse: the 'saving' cost more than it saved. The consistent explanation is a cheaper, lower-grade material that generated more waste and rejects. A favourable price variance is only good news if usage and quality hold.
Production manager: not justified either, and possibly the same root cause. £3,050 adverse on rate against £2,800 favourable on efficiency points to cheaper, less experienced labour working faster but producing more scrap - which would also explain part of the 400 kg material overuse. The two variances are interdependent, so neither manager can be credited or blamed in isolation.
The pattern: favourable price/rate offset by adverse usage/efficiency, leaving a deceptively small net figure. Reporting only the net masks an £11,650 gross problem and would allow a genuine quality failure to pass unnoticed for months. The correct response is joint investigation of purchasing, production and quality before any bonus is paid.
3. The production manager proposes reporting only the two net variances to the board because 'the detail is confusing'. Advise on how the variances should be reported and to whom.
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Reject the proposal, but improve the report rather than lengthen it. Netting a favourable against an adverse variance is only valid where they are genuinely independent. Here they are linked, so the net figure misleads.
Report by responsibility:
- Purchasing answers for the price variance, and is judged on price and the usage consequence of its sourcing decisions.
- Production answers for usage and efficiency, and for the rate variance only where it controls the mix of labour used.
- The board receives the operating statement: budgeted profit reconciled to actual profit through the variances, with a short commentary explaining the links.
Use exception reporting: set an investigation threshold (say £2,000 or 5% of the standard cost of the line) so only significant variances are escalated. That keeps the board pack short without hiding the story.
Add a quality measure - reject rate, scrap, customer complaints - so that price-driven savings cannot be booked as good news while the cost reappears as rework and warranty claims, and review whether the standard itself is now wrong.