Pathmark, Incorprated, uses a costing system with standard costs for direct mate
ID: 2493381 • Letter: P
Question
Pathmark, Incorprated, uses a costing system with standard costs for direct materials, direct labor, and overhead costs. There are two comments frequently mentioned by managers at the company in relation to standard costing and variance analysis: "Variances are not explanations" and "management's goal is not to minimize variances."
Imagine you are a member of a group of these managers discussing the comments at a roundtable training session being held at the company's annual managers retreat being held in Las Vegas. You have decided to comment on your interpretation of these phrases. Explain your point of view by using the correct terminology and citations.
Explanation / Answer
It is True that Variances by themselves are not expalanations. VAriances are results of many variable in the production process like the quantity, rate and quality of the materials,labor used and the overhead costs actually incurred against budget. There may be many factors that leads to materials , loabor and overhead variances. The variances by themselves will not reveal any insight unless we deep dive into the causes of such variances. Analysis of variances can provide some valuable information for the management that will lead to overall cost optimization. So Management must go beyond the variance figure and dig out the fcators that caused the variance.
2. "management's goal is not to minimize variances." This is also very true. The aim of management is optimum utilization of resources and maximize sharerholders' return. If management focuses only on a variance say price variance , that may result in procurement of cheaper materials but that will increase unfavorable efficiency variance and lower the quality of the product and in long term wil reduce the profit margin of the company. So management must have a balanced approach towards quantity and quality and ensure that the resourcces are used in an optimal manner and generating value added outputs instead of going for short sighted cost cutting without thinking the repurcussions.