Miracle Lights - Variation Analysis Paper

Introduction

By the request of Miracle Lights, Inc., Team B has prepared a variable analysis report with regard to the Brightlites product line. This analysis will be used to calculate the amounts and isolate the differences between actual costs and standard costs. From this information, the Miracle Lights management team will have the tools to implement changes to improve efficiency in the business operations. We will discuss several variances that we have discovered to have an unfavorable result which include price variance for raw materials purchased, direct labor rate, and variable overhead efficiency. The other variances, raw materials usage, direct labor efficiency and variable overhead spending had favorable results and we will provide the reasons for all the variances and give recommendations for improvement of the unfavorable outcomes.

Raw Materials Purchased

Description of Variance

A variance acknowledged after the purchase of raw materials that is caused by the differences between standard price and actual price of the raw materials utilized during the reporting period. This variance is utilized because organizations calculate and report raw materials at the time materials are procured as opposed to when they are utilized. Raw materials purchase price variance is fitting for when material inventories are maintained as opposed to procuring materials directly into production as in the just in time concept.

Reason for variance

The standard price of the raw materials is $6.80 and the actual price is $7.10, which resulted in a price variance being budget due to a $0.30 overage in the cost of raw materials; therefore, resulting in a total overage of $3,420, which is considered an unfavorable variance. Raw materials cost in producing a case of Brightlites is subject to change. The distributors and manufacturers of the raw materials may increase the cost based on economic standards for the materials in the marketplace, due to nature-related concerns, or as a result of their own business concerns. When the standard was developed, it may have been based on the raw materials prices for that time period but not considering changes that would impact the ultimate cost. Additionally, May 30 may have been during a holiday week (Memorial Day). This may have been a paid holiday for employees. If fewer cases were produced as a result of this holiday, there would be fewer cases to distribute the overall cost of producing the cases between, thus increasing the raw materials cost.

Recommendation to correct

If the materials that are purchased were routine purchases, it is recommended that establishing a long-term fixed price contract with suppliers would be in Brightlites' best interest, even if required, adding an economic price adjustment within the contract. Brightlites would then ensure that the variances between the standard price and the actual price paid would be minimal and have little impact on their actual production costs. Depending upon the situation, Brightlites could compete the requirement for a long-term fixed price type contract, which normally would result in overall lower prices. Additionally, it is recommended to reevaluate the standard to ensure it contains the most current information. Although changing the standard should not be done every time raw materials is procured.

Raw Materials Usage

Description of Variance

In variance analysis the raw material usage variance is the difference between the standard quantity of materials that should have been used for the number of units actually produced, and the actual quantity of materials used, based on the standard cost per unit of material.

Reason for variance

If the variance is positive then, the variance is favorable and a credit entry is made to a variance account. A favorable variance is a reduction in Cost of Good Sold. If the variance is negative then, the variance is unfavorable and a debit entry is made to a variance account. An unfavorable variance is an increase in Cost of Good Sold.

The raw materials usage variance for Brightlites was $1,632, which was due to utilizing 240 pounds less of raw material than was budgeted for the 1,900 cases of lights. This is a favorable material usage variance; however, not really a favorable result if the variance resulted from an undesirable activity, such as purchasing higher-than-standard inputs. The variance could have resulted from efficiencies (technology improvements) in manufacturing requiring fewer inputs to achieve desired usage.

"Generally, the production manager is responsible for the direct materials usage variance because he or she is responsible for how direct materials are used. In occurrences where direct materials are substandard, responsibility may lie with the purchasing department. Other causes of materials usage variance include the following:

Ð'* Incorrect machine settings or lack of proper tools

Ð'* Failure to keep machines and tools in good working condition

Ð'* Inexperienced or inefficient workers

Ð'* Fatigue caused by pressure to complete a rush order

Ð'* Changes in production or quality control methods

Ð'* Inadequate blueprints or errors in specifications

Ð'* Variations in yield from materials

Ð'* Failure to return excess materials to the storeroom

The direct materials standard quantity is affected by the desired size, shape, and quality of the finished product, as well as by the kind and quality of the direct materials used to make the product. An allowance for normal spoilage is included in determining practical standard quantities. A tighter standard results in a smaller allowance for scrap. When appropriate direct materials standard quantities are in effect, control over material losses, waste, and scrap is facilitated, because any usage variance from what was determined to be a reasonable amount can be traced to its source."

Recommendation to correct

The purchasing manager should be concerned with how sensitive purchasing higher than standard materials is to changes in materials usage and either adjust the usage accordingly or purchase an input of an appropriate standard and price. Additionally, the production manager should be concerned with how sensitive