Variance Investigation and Information System Controls at a Food Producer
Bracken Foods operates a standard costing system across four production lines. For Line 2 in March, the standard is 3 kg of input at 4.00 per kg per unit of output, giving a standard material cost of 12 per unit. Actual output was 9,000 units, using 28,500 kg of input costing 119,700. Line 2's materials price variance was reported as 5,700 adverse and its usage variance as 6,000 favourable. The management accountant investigates only variances above 5,000 in absolute terms. Separately, the purchasing clerk can amend supplier master data and post invoices without a second approval, and last month a duplicate payment of 18,000 was made to a supplier whose bank details had been changed by email request.
1. Recompute the material price and usage variances from the data, reconcile them to the total, and critique the investigation threshold.
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Standard quantities: 9,000 units x 3 kg = 27,000 kg. Standard price = 4.00 per kg.
Price variance: (actual price - standard price) x actual quantity.
- Actual price = 119,700 / 28,500 = 4.20 per kg.
- Price variance = (4.20 - 4.00) x 28,500 = 5,700 adverse. This agrees with the reported figure.
Usage variance: (actual quantity - standard quantity) x standard price.
- (28,500 - 27,000) x 4.00 = 6,000 adverse, not 6,000 favourable as reported.
The reported sign is wrong. The line used 1,500 kg more than standard, which is adverse. This is a material error: a favourable usage variance would have been credited to the production manager and would have masked poor performance.
Reconciliation: total material variance = price 5,700 A + usage 6,000 A = 11,700 adverse. Check directly: actual cost 119,700 less standard cost allowed (9,000 x 12 = 108,000) = 11,700 adverse. The reconciliation confirms the corrected figures.
Critique of the 5,000 threshold:
- Both variances (5,700 and 6,000) exceed the threshold, so both would be investigated - but the sign error means the usage variance was reported as favourable and may have been dismissed as good news, so the threshold alone did not protect against the error.
- A fixed absolute threshold ignores size relative to the cost base: 6,000 on a standard cost of 108,000 is 5.6%, while 6,000 on another line with a 2 million cost base is immaterial. A percentage or statistical control limit is better.
- It ignores trend and controllability: a small but persistent variance may signal a systemic problem.
- It creates a gaming risk: managers may keep variances just under 5,000 to avoid scrutiny.
Recommendation: investigate on a combined rule - absolute amount, percentage of standard cost, and trend - and add a review step that challenges the sign and narrative of every reported variance.
2. Evaluate the internal control weaknesses in the purchasing and payables process and recommend controls to prevent a repeat of the duplicate payment.
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Weaknesses identified:
- No segregation of duties. The purchasing clerk can amend supplier master data and post invoices. The same person can create a fictitious or altered supplier and then process a payment to it - the classic fraud combination.
- No second approval for master data changes. Bank detail changes are high-risk; a change requested by email is trivially spoofed.
- No call-back verification. The 18,000 duplicate arose from a bank detail change by email with no independent verification with the supplier using contact details already on file.
- No duplicate-payment detection. The system did not flag a second payment for the same invoice number or amount.
- No exception reporting on changed bank details or on payments to new or amended supplier records.
Recommended controls:
- Segregation of duties: master data maintenance restricted to a master-data team; invoice posting by accounts payable; payment release by a separate authorised signatory. System access rights reviewed quarterly.
- Maker-checker on master data: any supplier creation or bank detail change requires approval by a second authorised person.
- Call-back verification: bank changes verified by phone with the supplier using a number from the existing approved record, never from the email; documented on a standard form.
- Duplicate payment controls: three-way match (purchase order, goods receipt, invoice), plus a system check blocking payment of an invoice number already paid, and a periodic review of payments by amount and supplier.
- Exception reports: daily report of new suppliers, changed bank details, and payments to suppliers with no purchase order; reviewed by the finance manager.
- Training and whistleblowing: staff trained to recognise payment-diversion fraud, with a confidential reporting channel.
Detection and response: recover the 18,000, notify the bank and police if fraud is suspected, and review all payments to the affected supplier for the past 12 months.