Carol Morgan manages the production division of Thornton Corporation. Ms. Morgan
ID: 2584096 • Letter: C
Question
Carol Morgan manages the production division of Thornton Corporation. Ms. Morgan’s responsibility report for the month of August follows: Budget Actual Variance Controllable costs Raw materials $ 22,560 $ 27,260 $ 4,700 U Labor 8,190 12,720 4,530 U Maintenance 3,500 5,000 1,500 U Supplies 2,750 1,700 1,050 F Total $ 37,000 $ 46,680 $ 9,680 U The budget had called for 4,700 pounds of raw materials at $4.80 per pound, and 4,700 pounds were used during August; however, the purchasing department paid $5.80 per pound for the materials. The wage rate used to establish the budget was $18.20 per hour. On August 1, however, it increased to $21.20 as the result of an inflation index provision in the union contract. Furthermore, the purchasing department did not provide the materials needed in accordance with the production schedule, which forced Ms. Morgan to use 100 hours of overtime at a $31.80 rate. The projected 450 hours of labor in the budget would have been sufficient had it not been for the 100 hours of overtime. In other words, 550 hours of labor were used in August. Required When confronted with the unfavorable variances in her responsibility report, Ms. Morgan argued that the report was unfair because it held her accountable for materials and labor variances that she did not control. Is she correct? Calculate the variances of the items Ms. Morgan’s controlled during the period.
Explanation / Answer
Since Mrs Morgan is the production manager, she is responsible for labor efficiency and material quantity variances Other variances do not fall under the scope of her role Calculation of Material Quantity Variance Standard Quantity for Actual production = 4700 pounds Actual quantity used = 4700 pounds Since the above two are equal, there has not been any quantity variance Calculation of Labor efficiency Variance Standard hours for Actual production = 450 hours Actual hours worked = 550 hours There has been labor efficiency variance as seen above. But the reason behind this was the fault of Purchasing department not providing materials on time Considering the above facts, it can be said that Mrs Morgan was right in her argument