Madeleine Appliances manufactures washers and dryers on a single assembly line in its main factory. The market has deteriorated over the last five years and competition has made cost control very important. Management has been concerned about the material cost of both washers and dryers. There have been no model changes in the past two years, and economic conditions have allowed the company to negotiate price reductions for many key parts.
Madeleine uses a standard costing system. The price variance is the difference between the contract price and the standard price, multiplied by the actual quantity used. When a substitute part, rather than the regular part, is used in production, a price variance is calculated that is equal to the difference between the actual cost of the part used and the standard cost of the regular part. This variance is calculated at the time of substitution in the production process. The direct material quantity variance is the actual quantity used compared with the standard quantity allowed, with the difference multiplied by the standard price.
Roberta Speck, the purchasing manager, claims that unfavourable price variances are misleading. Speck says that her department has worked hard to obtain price concessions and purchase discounts from suppliers. In addition, Speck has indicated that engineering changes have been made in several parts, increasing their prices. These price increases are not her department’s responsibility. Speck declares that price variances simply no longer measure the Purchasing Department’s performance. Jim Buddle, the manufacturing manager, thinks that responsibility for the quantity variance should be shared. Buddle states that the manufacturing employees cannot control quality arising from less expensive parts, substitutions of material to use up otherwise obsolete stock, or engineering changes that increase the quantity of materials used.
Required:
Discuss the appropriateness of Madelaine’s current method of variance analysis for materials, and indicate whether the claims of Roberta Speck and Jim Buddle are valid?
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