Purpose: Articulate impacts and possible causes of variances from standards

KSAs: Understand variances; be able to identify causes and recommend solutions; write a memo

Points: 10

Admin: This is a multi-part question. There are no minimum word counts but you must answer the question in full. Address your response to the Plant Manager.

Discussion Initial Response Due by Wednesday: Killer Kitchens is a small manufacturer of custom kitchen cabinets. You are the Controller and you distributed the monthly variance report (see below table) to the company's managers last week. The Production Manager, Darius James, sent you the following email:

"I just received this variance report for last month's operations. I'm not very pleased with these figures. The variances are too large. If I understand the accounting approach being used here, you assume all production costs are variable to the units produced. Well, I don't believe these costs are variable at all. I think they are fixed costs. When we operate below capacity, the costs really don't go down. I'm being penalized for costs I have no control over. I need this report to be redone to reflect this fact. If anything, the difference between actual and budget is essentially a volume variance. Listen, I know that you are a team player but you really need to reconsider your assumptions on this one. Can we discuss this before you send the report to the owner?"

Write an email or memorandum to Darius. It must be in an email or memo format to receive full points.

Example of email:

Memorandum for the Record (MFR) Template To: From: Date: Subject: (Main Idea: This should summarize the entire memo in one line. Write this last.) (Examples/Background: This should provide context for the rest of the memo.) (Analysis/Evaluation: Demonstrate how the previous paragraph leads to the decision.) (Conclusion/Decision: Clearly state the decision and provide an actionable plan, if necessary.) Email Response Template (Opening: Acknowledge feelings of frustration, anger, etc.) (Main Idea: This should summarize the entire memo in one line. Write this last.) (Examples/Background: This should provide context for the rest of the memo. You should know the process well enough that you can characterize the salient parts in one or two paragraphs.) (Analysis/Evaluation: Demonstrate how the previous paragraph(s) leads to the decision.) (Conclusion/Decision: Clearly state the decision/perspective and provide an actionable plan, if necessary.)

Sample Email Response Question: Why do I have to pay mega bucks for car insurance? Answer: (Opening) I understand how frustrating it can be to pay so much money for car insurance. (Main Idea) Maintaining adequate insurance is critical to protecting your finances. (Examples/Background) Insurance (i.e., home, auto, etc.) is a risk management strategy that transfers financial risk from you to your insurance company. This is called risk transfer. You pay a monthly fee to transfer that risk and, if a qualifying event occurs such as a car accident, the insurance company will pay for covered costs. These costs may include legal fees, medical expenses, lost income, etc. (Analysis/Evaluation) Without insurance, you may find yourself in a position where you have no functioning car to drive to work and large medical and legal bills. While car insurance can be expensive, there are ways to reduce the cost. Strive to be a safe driver by decreasing in-car distractions and taking a defensive driving course. Other ways to save on insurance include downsizing your vehicle and increasing deductibles. (Conclusion) I hope you continue to maintain adequate insurance coverage. Contact your insurance representative if you have specific questions on reducing your coverage.

Incorporate the following in your memo:

description of variable factory overhead controllable variance; include whether they are fixed or variable

benefits and criticisms of standard costs

concepts of 'relevant range'

timeline for establishing standards (i.e., when are the standards set?)

whether you will reclassify some of the expenses