In her review of annual production variances, Amy Abel, CFO of Chance worth Manufacturing, noted that there was a $80,000 favorable material price variance, a $70,000 unfavorable material quantity variance, an $90,000 favorable labor rate variance, and a $180,000 unfavorable labor efficiency variance. From her previous discussions with factory supervisors and other managers, she knows that the purchasing department was able to buy materials at a bargain price. However, the material often failed stress tests, and a large number of items needed to be reworked. Also, the company had a brief strike. During the strike, the company hired a number of inexperienced, temporary replacement workers at wage rates significantly below those paid to the striking workers.
Required
a. Explain how the favorable material price variance and the favorable labor rate variance may be related to the unfavorable material quantity variance and the unfavorable labor efficiency variance.
b. Would you characterize the favorable material price variance as indicative of a good decision by the purchasing department?