Timber Industries manufactures unfinished furniture, which it sells through retail outlets. Timber produces many different styles of bookcases, tables, chairs, desks, and dressers that customers finish themselves with stain or paint. Timber utilizes a standard cost system and performs variance analysis. The company recently increased production to meet anticipated demand from several new retail outlets that opened in new sales territories. To accommodate the expected increase in sales demand, the production department hired five new employees from a local community college program. These new employees were immediately assigned to various production processes, such as milling, lathe, and assembly.

To meet the anticipated production needs, the purchasing department had to seek additional sources of lumber. The company ordered large quantities of high-grade oak, maple, and pine. The purchasing department insisted on obtaining high-quality materials, since poor-quality materials result in excess scrap, rework, and defects during the manufacturing process. Some of the new suppliers delivered materials that were warped or had too many knots or blemishes. Instead of returning the materials, the purchasing department negotiated "quality" credits from the suppliers. The poorer-quality wood then was sorted, remilled by Timber, and used in places where lower-quality material was acceptable, such as drawer bottoms and sides.

Several of the new retail outlets did not reach the sales volume that was originally expected. The sales department insists that with time, the new stores will gain recognition and their sales will increase. To deal with the increase in finished goods inventory, the sales department negotiated with a discount department chain to sell a limited line of Timber products in markets that did not compete directly with company-owned retail outlets.

Material and labor variances for Timber Industries were as follows:

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A. Based on the facts stated, identify contributing factors for the variances noted.
B. Discuss how Timber Industries could use variance analysis to analyze the performance measures of the purchasing, production, and sales departments.

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Material price variance Material usage variance Direct labor rate variance Direct labor efficiency variance Favorable Unfavorable Favorable Unfavorable