Variance Analysis Where the Standard Itself Is Suspect
Pennard Foods set a standard for its packaged meals: 0.5 kg of raw material per unit at $8 per kg, and 0.2 labour hours per unit at $15 per hour. Actual output for the month was 10,000 units, using 5,600 kg of material costing $47,600 and 2,200 labour hours costing $31,900. The production manager reports a favourable labour rate variance and blames an adverse material usage variance on 'poor-quality supplier stock'. The buying manager says she switched supplier six months ago to cut price and the standard was never updated.
1. Calculate the material price and usage variances and the labour rate and efficiency variances, and interpret them.
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Material price: actual quantity at actual price minus actual quantity at standard price = $47,600 - (5,600 x $8 = $44,800) = $2,800 adverse. Material usage: (5,600 - 5,000 standard kg) x $8 = $4,800 adverse. Labour rate: $31,900 - (2,200 x $15 = $33,000) = $1,100 favourable. Labour efficiency: (2,200 - 2,000 standard hours) x $15 = $3,000 adverse. Interpretation matters more than arithmetic: the favourable rate variance and adverse usage variance are linked, because cheaper material from the new supplier is being used less efficiently. Reporting them as separate, unrelated variances hides the trade-off and lets each manager deflect blame.
2. Advise how the standard-setting and reporting process should change, and what behavioural risk the current reporting creates.
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The standard is stale: it was not revised when the supplier changed, so variances measure the gap between an outdated benchmark and reality rather than controllable performance. Standards should be reviewed at least annually and whenever a significant input change occurs, with purchasing and production agreeing the quality-price trade-off. Reporting should show the net effect of the price-quality decision, not two variances that managers can each disown. The behavioural risk is that managers optimise their own variance: purchasing chases price and production absorbs the usage penalty, so total cost rises while both appear to have defensible positions. Variances should be attributed to the manager who controls the decision, and the combined effect reported to a single owner.