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Simply Soup Limited manufactures and sells soups in a JIT environment. Soup is made in a manufacturing process by mixing liquidised vegetables, melted butter and stock (stock in this context is a liquid used in making soups). They operate a standard costing and variances system to control its manufacturing processes. At the beginning of the current financial year they employed a new production manager to oversee the manufacturing process and to work alongside the purchasing manager. The production manager will be rewarded by a salary and a bonus based on the directly attributable variances involved in the manufacturing process After three months of work there is doubt about the performance of the new production manager. On the one hand, the cost variances look on the whole favourable, but the sales director has indicated that sales are significantly down and the overall profitability is decreasing. The table below shows the variance analysis results for the first three months of the manager’s work. Table 1 F = Favourable. A = Adverse Month 1 Month 2 Month 3 Material Price Variance $300 (F) $900 (A) $2,200 (A) Material Mix Variance $1,800 (F) $2,253 (F) $2,800 (F) Material Yield Variance $2,126 (F) $5,844 (F) $9,752 (F) Total Variance $4,226 (F) $7,197 (F) $10,352 (F) The actual level of activity was broadly the same in each month and the standard monthly material total cost was approximately $145,000. The standard cost card is as follows for the period under review $ 0.90 litres of liquidised vegetables @ $0.80/ltr 0.72 0.05 litres of melted butter @$4/ltr 0.20 1.10 litres of stock @ $0.50/ltr 0.55 Total cost to produce 1 litre of soup 1.47
Required: (a) Using the information in table 1: (i) Explain the meaning of each type of variances above (price, mix and yield but excluding the total variance) and briefly discuss to what extent each type of variance is controllable by the production manager. (ii) Evaluate the performance of the production manager considering both the cost variance results above and the sales director’s comments. (6 marks) (iii) Outline two suggestions how the performance management system might be changed to better reflect the performance of the production manager. (4 marks)
(b) The board has asked that the variances be calculated for Month 4. In Month 4 the production department data is as follows: Actual results for Month 4 Liquidised vegetables: Bought 82,000 litres costing $69,700 Melted butter: Bought 4,900 litres costing $21,070 Stock: Bought 122,000 litres costing $58,560 Actual production was 112,000 litres of soup Required: Calculate the material price, mix and yield variances for Month 4. You are not required to comment on the performance that the calculations imply. Round variances to the nearest $. (9 marks) |