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Why might an analyst examining variances in the production area look beyond that business function for explanations of those variances?

Short Answer

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An analyst examining variances in the production area might look beyond that business function for explanations of those variances because factors outside the production process, such as purchasing and procurement, sales and marketing, and management decisions can directly or indirectly impact the production process, leading to deviations from the planned performance. These external factors can affect production costs, efficiency, quality, and volumes, thus contributing to the variances observed.
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Step 1: Understand the concept of variances

Variances refer to the differences between actual performance and the planned or standard performance. In the context of the production process, this might include differences in production volume, costs, efficiency, or quality.

Step 2: Identify areas outside the production process

There may be various departments or areas in a business that can impact the production process and contribute to variances observed. Some examples of these areas are purchasing and procurement, sales and marketing, and management decisions.

Step 3: Explain the impact of purchasing and procurement on production variances

The purchasing department plays a crucial role in ensuring the availability of raw materials and components needed for production. If the procurement team fails to obtain the required materials, or if they purchase materials of lower quality or higher price than planned, it may directly impact production costs, efficiency, and quality, thus contributing to variances.

Step 4: Explain the impact of sales and marketing on production variances

Sales and marketing activities can influence production variances in several ways. For example, if there are significant changes in the market demand for a product, it could affect production volumes. Similarly, if sales and marketing efforts result in variations in product mix sold, it may impact the resources and costs associated with production.

Step 5: Explain the impact of management decisions on production variances

Management decisions, such as changes to the production process, implementation of new technology, or alterations in the organization's structure, can also contribute to production variances. These changes may impact production efficiency, costs, or quality, which can further lead to variances from the original plan. In conclusion, an analyst examining variances in the production area should look beyond that business function for explanations of those variances, as factors such as purchasing and procurement, sales and marketing, and management decisions can all have a direct or indirect impact on the production process and its performance.

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Most popular questions from this chapter

Chapter 7

"Benchmarking against other companies enables a company to identify the lowest-cost producer. This amount should become the performance measure for next year." Do you agree?

Chapter 7

Bank Management Printers, Inc., produces luxury check-books with three checks and stubs per page. Each checkbook is designed for an individual customer and is ordered through the customer's bank. The company's operating budget for September 2017 included these data: The actual results for September 2017 were as follows: The executive vice president of the company observed that the operating income for September was much lower than anticipated, despite a higher-than-budgeted selling price and a lower-than-budgeted variable cost per unit. As the company's management accountant, you have been asked to provide explanations for the disappointing September results. Bank Management develops its flexible budget on the basis of budgeted per- output-unit revenue and per-output-unit variable costs without detailed analysis of budgeted inputs. 1\. Prepare a static-budget-based variance analysis of the September performance. 2\. Prepare a flexible-budget-based variance analysis of the September performance. 3\. Why might Bank Management find the flexible-budget-based variance analysis more informative than the static-budget-based variance analysis? Explain your answer.

Chapter 7

List four reasons for using standard costs.

Chapter 7

Why might managers find a flexible-budget analysis more informative than a static-budget analysis?

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Ellis Animal Health, Inc., produces a generic medication used to treat cats with feline diabetes. The liquid medication is sold in \(100 \mathrm{ml}\) vials. Ellis employs a team of sales representatives who are paid varying amounts of commission. Given the narrow margins in the generic veterinary drugs industry, Ellis relies on tight standards and cost controls to manage its operations. Ellis has the following budgeted standards for the month of April 2017: Ellis budgeted sales of 700,000 vials for April. At the end of the month, the controller revealed that actual results for April had deviated from the budget in several ways: \- Unit sales and production were \(90 \%\) of plan. \- Actual average selling price decreased to \(\$ 8.20\) " \- Productivity dropped to 90 vials per hour. \- Actual direct manufacturing labor cost was \(\$ 15.20\) per hour \- Actual total direct material cost per unit increased to \(\$ 3.90\). \- Actual sales commissions were \(\$ 0.70\) per vial. \- Fixed overhead costs were \(\$ 110,000\) above budget. Calculate the following amounts for Ellis for April 2017: 1\. Static-budget and actual operating income 2\. Static-budget variance for operating income 3\. Flexible-budget operating income 4\. Flexible-budget variance for operating income 5\. Sales-volume variance for operating income 6\. Price and efficiency variances for direct manufacturing labor 7\. Flexible-budget variance for direct manufacturing labor

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