Calculating variances

Application: Calculating Variances and Analyzing the Results

While many organizational costs can be planned for, the actual results may vary from the initial projections. Assessing how these variances impact the bottom line is an essential task of many managers.

For this Assignment, review the Learning Resources for this week and consider how they might apply to the scenario presented. Consider how variance analysis and the results obtained from conducting such an analysis might impact decision making.

Spine Line is a manufacturer of high-quality products designed to help support healthy spines. Their newest product offering is a massage chart. Below is the standard cost structure for the chair:

Standard Cost Sheet: Massage Chair

Metal tubing	6 meters @ $3	$18.00
Leather	2 square meters @ $7	$14.00
Padding	3 kilograms @$4	$12.00
Direct labor	4 hours @ $15	$60.00
Total standard cost		$104.00

This month, Spine Line manufactured 500 massage chairs. The following costs were incurred:

Actual Costs Incurred for the Month: Massage Chair

Metal tubing	3,100 meters	$9,455
Leather	1,100 square meters	$7,722
Padding	1,600 kilograms	$6,560
Direct Labor	1,800 hours	$27,270
Total cost		$51,007

Adapted from: Zimmerman, J. L. (2014). Accounting for decision making and control (8th ed.). New York: NY: McGraw-Hill, “Healing Touch”, p. 565.

Suppose you are the senior controller for Spine Line and you plan to perform a variance analysis of the massage chairs manufactured to determine if the standards are being met. Once you have completed the analysis, you plan to show it to the production department manager and ask for an explanation of any variances that you believe should be examined.

The Assignment:

• Part 1: Calculate all materials and labor variances in a spreadsheet by using a program like Excel. Be sure to include price, quantity, wage rate, and labor efficiency variances.
• Part 2: Prepare a memo to your subordinate, using a program like Word.
• Summarize and analyze the actual costs in relation to the standard costs incurred for the month.
• Ask for clarification of any variances that need to be investigated