This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
10-1 A &"antit' stanar inicates howm"ch o( an inp"t sho"l )e "se to ma*ea "nit o( o"tp"t. A price stanar inicateshow m"ch the inp"t sho"l cost.
10-2 Ieal stanars ass"me per(ection
an o not allow (or an' ine+cienc'. Iealstanars are rarel', i( ever, attaine.ractical stanars can )e attaine )'emplo'ees wor*ing at a reasona)le,tho"gh e+cient pace an allow (or normal)rea*s an wor* interr"ptions.
10-3 ner management )' eception,managers (oc"s their attention on res"ltsthat eviate (rom epectations. It isass"me that res"lts that meetepectations o not re&"ire investigation.
10-4 !eparating an overall variance intoa price variance an a &"antit' varianceprovies more in(ormation. Moreover,price an &"antit' variances are "s"all'the responsi)ilities o( i/erent managers.
10-5 The materials price variance is"s"all' the responsi)ilit' o( the p"rchasingmanager. The materials &"antit' an la)ore+cienc' variances are "s"all' theresponsi)ilit' o( pro"ction managers ans"pervisors.
10-6 The materials price variance can )ecomp"te either when materials arep"rchase or when the' are place intopro"ction. It is "s"all' )etter to comp"tethe variance when materials arep"rchase )eca"se that is when thep"rchasing manager, who hasresponsi)ilit' (or this variance, hascomplete his or her wor*. In aition,recogniing the price variance whenmaterials are p"rchase allows thecompan' to carr' its raw materials in the
inventor' acco"nts at stanar cost, whichgreatl' simplies )oo**eeping.
10-7 This com)ination o( variances ma'inicate that in(erior &"alit' materialswere p"rchase at a isco"nte price, )"tthe low-&"alit' materials createpro"ction pro)lems.
10-8 I( stanars are "se to n who to)lame (or pro)lems, the' can )reeresentment an "nermine morale.!tanars sho"l not )e "se to nsomeone to )lame (or pro)lems.
10-9 !everal (actors other than thecontract"al rate pai to wor*ers can ca"sea la)or rate variance. or eample, s*illewor*ers with high ho"rl' rates o( pa' can)e given "ties that re&"ire little s*ill anthat call (or low ho"rl' rates o( pa',res"lting in an "n(avora)le rate variance.3r "ns*ille or "ntraine wor*ers can )eassigne to tas*s that sho"l )e lle )'more s*ille wor*ers with higher rates o(pa', res"lting in a (avora)le rate variance.n(avora)le rate variances can also arise(rom overtime wor* at premi"m rates.
10-10 I( poor &"alit' materials createpro"ction pro)lems, a res"lt co"l )eecessive la)or time an there(ore an"n(avora)le la)or e+cienc' variance. oor&"alit' materials wo"l not orinaril'a/ect the la)or rate variance.
10-11 I( overhea is applie on the )asiso( irect la)or-ho"rs, then the varia)leoverhea e+cienc' variance an theirect la)or e+cienc' variance will alwa's)e (avora)le or "n(avora)le together. 4oth
variances are comp"te )' comparing then"m)er o( irect la)or-ho"rs act"all'wor*e to the stanar ho"rs allowe.
That is, in each case the (orm"la is5
6+cienc' variance 7 !89AH : !H;
3nl' the <!8= part o( the (orm"la, thestanar rate, i/ers )etween the twovariances.
10-12 A statistical control chart is agraphical ai that helps ienti(' variances
that sho"l )e investigate. pper anlower limits are set on the control chart.An' variances (alling )etween those limitsare consiere to )e normal. An'variances (alling o"tsie o( those limits areconsiere a)normal an are investigate.
10-13 I( la)or is a e cost anstanars are tight, then the onl' wa' togenerate (avora)le la)or e+cienc'
variances is (or ever' wor*station topro"ce at capacit'. However, the o"tp"to( the entire s'stem is limite )' thecapacit' o( the )ottlenec*. I( wor*stations)e(ore the )ottlenec* in the pro"ctionprocess pro"ce at capacit', the
)ottlenec* will )e "na)le to process all o(
the wor* in process. In general, i( ever'wor*station is attempting to pro"ce atcapacit', then wor* in process inventor'will )"il "p in (ront o( the wor*stationswith the least capacit'.
1. I( the total la)or spening variance is BJJ0 "n(avora)le, an i(the la)or rate variance is B10 (avora)le, then the la)ore+cienc' variance m"st )e B#$0 "n(avora)le, )eca"se the
la)or rate an la)or e+cienc' variances ta*en together e&"althe total la)or spening variance.
Lnowing that the la)or e+cienc' variance is B#$0 "n(avora)le,one approach to the sol"tion wo"l )e5
?otice in the sol"tion )elow that the materials price variance iscomp"te on the entire amo"nt o( materials p"rchase, whereasthe materials &"antit' variance is comp"te onl' on the amo"nt
o( materials "se in pro"ction.
!tanar D"antit'Allowe (or Act"al
3"tp"t,at !tanar rice
9!D @ !;
Act"al D"antit'o( Inp"t,
at !tanar rice9AD @ !;
Act"al D"antit'o( Inp"t,
at Act"al rice9AD @ A;
1#,#00 o"ncesE @ B2.0 per o"nce
7 BJ,000
1,000 o"nces @B2.0 per o"nce
7 B#0,000
20,000 o"nces @B2.#0 per o"nce
7 B#$,000Materials &"antit'
variance 7 B#,000
20,000 o"nces @B2.0 per o"nce
7 B0,000
Materials pricevariance
7 B2,000
E2,000 )ottles @ %.2 o"nces per )ottle 7 1#,#00 o"nces
Alternativel', the variances can )e comp"te "sing the(orm"las5
1. a. Notice in the solution below that the materials price variance is computed on theentire amount of materials purchased, whereas the materials quantity variance is computed onlyon the amount of materials used in production.
!tanar D"antit'Allowe (or Act"al
3"tp"t,at !tanar rice
9!D @ !;
Act"al D"antit'o( Inp"t,
at !tanar rice9AD @ !;
Act"al D"antit'o( Inp"t,
at Act"al rice9AD @ A;
#0,000 ioesE @ B0.J0 per ioe
7 B12,000
0,000 ioes @ B0.J0 per ioe
7 B1,000
%0,000 ioes @ B0.2$ per ioe
7 B1>,00
Materials &"antit'variance 7 BJ,000
%0,000 ioes @ B0.J0 per ioe
7 B21,000
Materials pricevariance
7 B1,#00
E,000 to's @ $ ioes per to' 7 #0,000 ioes
Alternativel', the variances can )e comp"te "sing the(orm"las5
2. A variance "s"all' has man' possi)le eplanations. Inpartic"lar, we sho"l alwa's *eep in min that the stanarsthemselves ma' )e incorrect. !ome o( the other possi)le
eplanations (or the variances o)serve at Topper To's appear)elow5
Materials Price VarianceO!ince this variance is (avora)le, theact"al price pai per "nit (or the material was less than thestanar price. This co"l occ"r (or a variet' o( reasons incl"ingthe p"rchase o( a lower grae material at a isco"nt, )"'ing inan "n"s"all' large &"antit' to ta*e avantage o( &"antit'isco"nts, a change in the mar*et price o( the material, anpartic"larl' sharp )argaining )' the p"rchasing epartment.
Materials Quantity VarianceO!ince this variance is "n(avora)le,more materials were "se to pro"ce the act"al o"tp"t thanwere calle (or )' the stanar. This co"l also occ"r (or avariet' o( reasons. !ome o( the possi)ilities incl"e poorl'traine or s"pervise wor*ers, improperl' aP"ste machines,an e(ective materials.
Labor Rate VarianceO!ince this variance is "n(avora)le, theact"al average wage rate was higher than the stanar wagerate. !ome o( the possi)le eplanations incl"e an increase in
wages that has not )een reQecte in the stanars,"nanticipate overtime, an a shi(t towar more highl' paiwor*ers.
Labor Efciency VarianceO!ince this variance is "n(avora)le,the act"al n"m)er o( la)or ho"rs was greater than the stanarla)or ho"rs allowe (or the act"al o"tp"t. As with the othervariances, this variance co"l have )een ca"se )' an' o( an"m)er o( (actors. !ome o( the possi)le eplanations incl"epoor s"pervision, poorl' traine wor*ers, low-&"alit' materials
re&"iring more la)or time to process, an machine )rea*owns.In aition, i( the irect la)or (orce is essentiall' e, an"n(avora)le la)or e+cienc' variance co"l )e ca"se )' are"ction in o"tp"t "e to ecrease eman (or the compan'Rspro"cts.
?ote that all o( the price variance is "e to the hospitalRs #&"antit' isco"nt. Also note that the B$,000 &"antit' variance(or the month is e&"al to nearl' J0 o( the stanar cost
allowe (or plates. This variance ma' )e the res"lt o( "sing tooman' assistants in the la).
2. a. The standard hours allowed for tests performed during the month would be:
!mears5 0.J ho"r per test @ 2,%00tests.................................................. $10
4loo tests5 0. ho"r per test @ >00tests.................................................. #0
Total stanar ho"rs allowe............... 1,J0
The variance analysis of labor would be:
!tanar Ho"rsAllowe
(or Act"al 3"tp"t,at !tanar 8ate
9!H @ !8;
Act"al Ho"rs o( Inp"t,
at !tanar 8ate9AH @ !8;
Act"al Ho"rs o( Inp"t,
at Act"al 8ate9AH @ A8;
1,J0 ho"rs @B12 per ho"r7 B1,200
1,$00 ho"rs @B12 per ho"r7 B21,00 B1$,#0
a)or e+cienc'variance
7 B,#00
a)or rate variance
7 BJ,10 !pening variance 7 B2,20
Alternativel', the variances can )e comp"te "sing the(orm"las5
2. b. The policy probably should not be continued. lthough the hospital is saving!1."# per hour by employing more assistants relative to the number of senior technicians thanother hospitals, this savings is more than offset by other factors. Too much time is being ta$en in performing lab tests, as indicated by the large unfavorable labor efficiency variance. nd, it seemsli$ely that most %or all& of the hospital's unfavorable quantity variance for plates is traceable toinadequate supervision of assistants in the lab.
J. The varia)le overhea variances (ollow5
!tanar Ho"rsAllowe
(or Act"al 3"tp"t,at !tanar 8ate
9!H @ !8;
Act"al Ho"rs o( Inp"t,
at !tanar 8ate9AH @ !8;
Act"al Ho"rs o( Inp"t,
at Act"al 8ate9AH @ A8;
1,J0 ho"rs @B.00 per ho"r7 B$,100
1,$00 ho"rs @B.00 per ho"r7 B10,$00 B11,%00
aria)le overheae+cienc' variance
7 B2,%00
aria)le overhearate variance
7 B>00 !pening variance 7 BJ,00
Alternativel', the variances can )e comp"te "sing the
aria)le overhea rate variance 7 AH 9A8 : !8;7 1,$00 ho"rs 9B.0 per ho"rE : B.00 per ho"r;7 B>00 EB11,%00 F 1,$00 ho"rs 7 B.0 per ho"r
Ues, the two variances are relate. 4oth are comp"te )'comparing act"al la)or time to the stanar ho"rs allowe (orthe o"tp"t o( the perio. Th"s, i( there is an "n(avora)le la)ore+cienc' variance, there will also )e an "n(avora)le varia)leoverhea e+cienc' variance.
1. a. (n the solution below, the materials price variance is computed on the entireamount of materials purchased, whereas the materials quantity variance is computed only on theamount of materials used in production:
!tanar D"antit'Allowe (or Act"al
3"tp"t,at !tanar rice
9!D @ !;
Act"al D"antit'o( Inp"t,
at !tanar rice9AD @ !;
Act"al D"antit'o( Inp"t,
at Act"al rice9AD @ A;
#,00 po"nsE @B.00 per po"n
7 B2%,000
,000 po"ns @ B.00 per po"n
7 BJ,000 B#,000
Materials &"antit'
variance 7 B>,000
$,000 po"ns @B.00 per po"n
7 B#$,000
Materials pricevariance
7 B2,000
EJ,000 "nits @ 1. po"ns per "nit 7 #,00 po"ns
Alternativel', the variances can )e comp"te "sing the(orm"las5
Materials &"antit' variance 7 ! 9AD : !D;7 B per po"n 9,000 po"ns : #,00 po"ns; 7 B>,000
Materials price variance 7 AD 9A : !;7 $,000 po"ns 9B.% per po"nE : B.00 per po"n; 7
B2,000 EB#,000 F $,000 po"ns 7 B.% per po"n
b. No, the contract should probably not be signed. lthough the new supplier is offering thematerial at only !#."# per pound, the large materials quantity variance indicates a problem usingthese materials is production. The company still has 2,))) pounds of unused material in thewarehouse* if these materials do as poorly in production as the +,))) pounds already used, thetotal quantity variance on the ,))) pounds of materials purchased will be very large.
E J,000 "nits @ 0. ho"rs per "nit 7 1,$00 ho"rsEE 10 wor*ers @ 10 ho"rs per
wor*er 7 1,00 ho"rs
Alternativel', the variances can )e comp"te "sing the(orm"las5
a)or e+cienc' variance 7 !8 9AH : !H;
7 B12.00 per ho"r 91,00 ho"rs : 1,$00 ho"rs;7 B2,#00
a)or rate variance 7 AH 9A8 : !8;7 1,00 ho"rs 9B12.0 per ho"r : B12.00 per ho"r;7 B$00
b. -es, the new labor mi should probably be continued. lthough it increases the averagehourly labor cost from !12.)) to !12.#), resulting in an !)) unfavorable labor rate variance, thisis more than offset by greater efficiency of labor time. Notice that the labor efficiency variance is!2,/)) favorable. Thus, the new labor mi reduces overall labor costs.
7 1,00 ho"rs 9B2.2 per ho"rE : B2.0 per ho"r;7 B#00 EBJ,00 F 1,00 ho"rs 7 B2.2 per ho"r
4oth the la)or e+cienc' variance an the varia)le overheae+cienc' variance are comp"te )' comparing act"al la)or-ho"rs to stanar la)or-ho"rs. Th"s, i( the la)or e+cienc'variance is (avora)le, then the varia)le overhea e+cienc'variance will )e (avora)le as well.
ortion "e to other variances.................... B0.%
In s"m, ha it not )een (or the apparent ine+cient "se o( la)ortime, the total variance in "nit cost (or the month wo"l have)een (avora)le )' B0.% rather than "n(avora)le )' B0.#0.
#. Altho"gh the ecess o( act"al cost over stanar cost is onl'B0.#0 per "nit, the total amo"nt o( B#,$00 97 B0.#0 per "nit @12,000 "nits; is s")stantial. Moreover, the etails o( thevariances are signicant. The materials price variance is B#,200, the la)or e+cienc' variance is B10,$00 , the la)or ratevariance is B,$#0 , the varia)le overhea e+cienc' variance
is BJ,000 , an the varia)le rate variance is B#,0 . Ta*entogether, the two variances that reQect apparent ine+cient "seo( the la)or time total B1J,$00 . 6ach o( these variances ma'warrant ("rther investigation.
!tanar materials cost per *it B22.$0 per *it7 7J.$ 'ars per *it
!tanar materials cost per 'ar BG per 'ar
J. !ince there were no )eginning or ening inventories o(materials, all o( the materials that were p"rchase "ring theperio were "se in pro"ction. There(ore, the s"m o( the pricean &"antit' variances e&"als the spening variance, which isthe i/erence )etween the act"al cost an stanar cost o(materials "se in pro"ction.
Act"al cost o( material "se........ B10,000
!tanar cost o( material "se.. . 11,#00!pening variance...................... B 1,#00
As isc"sse a)ove, in this case the price an &"antit' variancestogether e&"al the spening variance. I( the &"antit' variance isB00 , then the price variance m"st )e B2,0005
Materials price variance.............. B 2,000 Materials &"antit' variance......... 00 !pening variance...................... B 1,#00
#. The rst step in comp"ting the stanar irect la)or rate is toetermine the stanar irect la)or-ho"rs allowe (or the
monthRs pro"ction. The stanar irect la)or-ho"rs can )ecomp"te )' wor*ing with the varia)le man"(act"ringoverhea cost g"res )eca"se the' are )ase on irect la)or-ho"rs wor*e5
This is a ver' i+c"lt pro)lem that is harer than it loo*s. 4e s"re'o"r st"ents have )een thoro"ghl' <chec*e o"t= in thevariance (orm"las )e(ore assigning it.
1.
!tanar D"antit'Allowe
(or Act"al 3"tp"t,at !tanar rice
9!D @ !;
Act"al D"antit' o( Inp"t,
at !tanar rice9AD @ !;
Act"al D"antit' o( Inp"t,
at Act"al rice9AD @ A;
,00 'arsEE @B.0 per 'arE
7 BJ,#00
,000 'ars @B.0 per 'arE
7 BJ>,000 BJ,000
Materials &"antit'variance 7 B2,00
Materials pricevariance 7 BJ,000
!pening variance 7 B#00
EB1$.20 F 2.$ 'ars 7 B.0 per 'ar.EE2,000 "nits @ 2.$ 'ars per "nit 7 ,00 'ars
Alternativel', the variances can )e comp"te "sing the(orm"las5
2. Man' st"ents will miss parts 2 an J )eca"se the' will tr' to"se product costs as i( the' were hourly costs. a' partic"larattention to the comp"tation o( the stanar irect la)or time
per "nit an the stanar irect la)or rate per ho"r.
!tanar Ho"rsAllowe
(or Act"al 3"tp"t,at !tanar 8ate
9!H @ !8;
Act"al Ho"rs o( Inp"t,
at !tanar 8ate9AH @ !8;
Act"al Ho"rs o( Inp"t,
at Act"al 8ate9AH @ A8;
$00 ho"rsEE @B> per ho"rE
7 B%,200
%0 ho"rs @B> per ho"rE
7 B,$#0 B%,00
a)or e+cienc'variance7 BJ0
a)or rate variance
B%0 !pening variance 7 B#00
E %$0 stanar ho"rs F 1,>0 ro)es 7 0.# stanar ho"rper ro)e
BJ.0 stanar cost per ro)e F 0.# stanar ho"rs 7 B>stanar rate per ho"r
1. The n"m)er o( "nits pro"ce can )e comp"te )' "sing thetotal stanar cost applie (or the perio (or any inp"t materials, la)or, or varia)le overhea. sing the stanar cost
applie (or materials, we have5
Total stanar cost applie BG0$,0007 71>,000 "nits
!tanar cost per "nit BJ2.00 per "nit
The same answer can )e o)taine )' "sing an' other costinp"t.
2. #0,000 metersX see the (ollowing pages (or a etaile anal'sis.
J. B1.%1 per meterX see the (ollowing pages (or a etaileanal'sis.
#. 20,000 ho"rsX see the (ollowing pages (or a etaile anal'sis.
. B1.20 per ho"rX see the (ollowing pages (or a etaileanal'sis.
. B1%,000X see the (ollowing pages (or a etaile anal'sis.
Total o( variances...................................... B12,20
?otice that the total o( the variances agrees with the B12,20"n(avora)le variance mentione )' the vice presient.
It appears that not ever'one sho"l )e given a )on"s (or goocost control. The materials price variance an the la)ore+cienc' variance are %.1 an $.J, respectivel', o( the
stanar cost allowe an th"s wo"l warrant investigation. Inaition, the varia)le overhea spening variance is .0 o(the stanar cost allowe.
The reason the compan'Rs large "n(avora)le variances 9(ormaterials price an la)or e+cienc'; o not show "p moreclearl' is that the' are o/set )' the compan'Rs (avora)levol"me variance (or the 'ear. This (avora)le vol"me variance isthe res"lt o( the compan' operating at an activit' level that iswell a)ove the enominator activit' level "se to setpreetermine overhea rates. 9The compan' operate at anactivit' level o( J0,000 stanar SHsX the enominatoractivit' level set at the )eginning o( the 'ear was 2,000SHs.; As a res"lt o( the large (avora)le vol"me variance, the"n(avora)le price an e+cienc' variances have )eenconceale in a small <net= g"re. inall', the large (avora)levol"me variance ma' have )een achieve )' )"iling "p
. The maPor isavantage o( "sing normal activit' as theenominator in the preetermine rate is the large vol"mevariance that orinaril' res"lts. This occ"rs )eca"se the
enominator activit' "se to comp"te the preetermineoverhea rate is i/erent (rom the activit' level that isanticipate (or the perio. In the case at han, the compan'has "se the normal activit' o( #0,000 irect la)or-ho"rs tocomp"te the preetermine overhea rate, whereas activit' (orthe perio was epecte to )e 0,000 SHs. This has res"ltein a large (avora)le vol"me variance that ma' )e i+c"lt (ormanagement to interpret. In aition, the large (avora)levol"me variance in this case has mas*e the (act that the
compan' i not achieve the )"gete level o( activit' (or theperio. The compan' ha planne to wor* 0,000 SHs, )"tmanage to wor* onl' #,20 SHs 9at stanar;. This"n(avora)le res"lt is conceale "e to "sing a enominatorg"re that is o"t o( step with c"rrent activit'.
3n the other han, )' "sing normal activit' as the enominator"nit costs are sta)le (rom 'ear to 'ear. Th"s, managementRsecisions are not clo"e )' "nit costs that P"mp "p an ownas the activit' level rises an (alls.
Variable o%erhead rate %ariance& This variance incl"es )oth
price an &"antit' elements. The overhea spening variancereQects i/erences )etween act"al an stanar prices (orvaria)le overhea items. It also reQects i/erences )etweenthe amo"nts o( varia)le overhea inp"ts that were act"all'"se an the amo"nts that sho"l have )een "se (or theact"al o"tp"t o( the perio. 4eca"se the varia)le overheaspening variance is "n(avora)le, either too m"ch was pai (orvaria)le overhea items or too man' o( them were "se.
Variable o%erhead efciency %ariance& The term <varia)leoverhea e+cienc' variance= is a misnomer, )eca"se thevariance oes not meas"re e+cienc' in the "se o( overheaitems. It meas"res the inirect e/ect on varia)le overhea o(the e+cienc' or ine+cienc' with which the activit' )ase is"tilie. In this compan', machine-ho"rs is the activit' )ase. I(varia)le overhea is reall' proportional to machine-ho"rs, thenmore e/ective "se o( machine-ho"rs has the inirect e/ect o(re"cing varia)le overhea. 4eca"se 1,000 (ewer machine-ho"rs were re&"ire than inicate )' the stanars, theinirect e/ect was pres"ma)l' to re"ce varia)le overhea
spening )' a)o"t [1,%0 9[1.% per machine-ho"r @ 1,000machine-ho"rs;.
ie overhea
!i"ed o%erhead bud+et %ariance& This variance is simpl' thei/erence )etween the )"gete e cost an the act"ale cost. In this case, the variance is (avora)le, whichinicates that act"al e costs were lower than anticipate inthe )"get.
!i"ed o%erhead %olu$e %ariance& This variance occ"rs as ares"lt o( act"al activit' )eing i/erent (rom the enominatoractivit' that was "se in the preetermine overhea rate. Inthis case, the variance is "n(avora)le, so act"al activit' wasless than the enominator activit'. It is i+c"lt to place m"cho( a meaning("l economic interpretation on this variance. Ittens to )e large, so it o(ten swamps the other, more
. 3nl' the vol"me variance wo"l have change. It wo"l have)een "n(avora)le, )eca"se the stanar SHs allowe (or the'earRs pro"ction 9JJ,000 SHs; wo"l have )een less than theenominator SHs 9J,000 SHs;.
#. The choice o( a enominator activit' level a/ects stanar "nitcosts in that the higher the enominator activit' level chosen,the lower stanar "nit costs will )e. The reason is that thee portion o( overhea costs is sprea over more "nits as theenominator activit' increases.
The vol"me variance cannot )e controlle )' controlling
spening. The vol"me variance simpl' reQects whether act"alactivit' was greater or less than the enominator activit'. Th"s,the vol"me variance is controlla)le onl' thro"gh activit'.
b. No. >hen variable manufacturing overhead is applied on the basis of direct labor?hours,it is impossible to have an unfavorable variable manufacturing overhead efficiency variance whenthe direct labor efficiency variance is favorable. The variable manufacturing overhead efficiencyvariance is the same as the direct labor efficiency variance ecept that the difference betweenactual hours and the standard hours allowed for the output is multiplied by a different rate. (f thedirect labor efficiency variance is favorable, the variable manufacturing overhead efficiencyvariance must also be favorable.
#. !or $aterials&
<avorable price variance: Decrease in outside purchase prices, fortunate buy, inferior qualitymaterials, unusual discounts due to quantity purchased, inaccurate standards.
This case ma' )e i+c"lt (or some st"ents to grasp )eca"se itre&"ires loo*ing at stanar costs (rom an entirel' i/erentperspective. In this case, stanar costs have )een
inappropriatel' "se as a means to manip"late reporte earningsrather than as a wa' to control costs.
1. ansing has evientl' set ver' loose stanars in which thestanar prices an stanar &"antities are (ar too high. Thisg"arantees that (avora)le variances will orinaril' res"lt (romoperations. I( the stanar costs are set articiall' high, thestanar cost o( goos sol will )e articiall' high an th"s theivisionRs net operating income will )e epresse "ntil the
(avora)le variances are recognie. I( ansing saves the(avora)le variances, he can release P"st eno"gh in the seconan thir &"arters to show some improvement an then he canrelease all o( the rest in the last &"arter, creating the ann"al<Christmas present.=
2. ansing sho"l not )e permitte to contin"e this practice (orseveral reasons. irst, it istorts the &"arterl' earnings (or )oththe ivision an the compan'. The istortions o( the ivisionRs&"arterl' earnings are tro")ling )eca"se the manip"lations
ma' mas* real signs o( tro")le. The istortions o( thecompan'Rs &"arterl' earnings are tro")ling )eca"se the' ma'mislea eternal "sers o( the nancial statements. !econ,ansing sho"l not )e reware (or manip"lating earnings. Thissets a moral tone in the compan' that is li*el' to lea to eveneeper tro")le. Inee, the permissive attit"e o( topmanagement towar the manip"lation o( earnings ma' inicatethe eistence o( other, even more serio"s, ethical pro)lems inthe compan'. Thir, a clear message sho"l )e sent to ivision
managers li*e ansing that their Po) is to manage theiroperations, not their earnings. I( the' *eep on top o( operationsan manage well, the earnings sho"l ta*e care o( themselves.