Scenario 3

One of Hoa Sen Group subsidiary called Smart Co. manufactures security cards that restrict access to government owned buildings around the region. The standard cost for the plastic that goes into making a card is $4.2 per kg and each card uses 45g of plastic after an allowance for waste. In January 120,000 cards were produced and sold by Smart Co. and this was well above the budgeted sales of 90,000 cards

The actual cost of the plastic was $5.2 per kg and the production manager (who is responsible for all buying and production issues) was asked to explain the increase. He said World oil price increases pushes up plastic prices by 30% compared to our budget and I also decided to use a different supplier who promised better quality and increased reliability for a slightly higher price. I know we have overspent but not all the increase in plastic prices is my fault. The actual usage of plastic per card was 41g and again the production manager had an explanation. He said The world-wide standard size for security cards increased by 6% due to an change in the card reader technology, however, our new supplier provided much better quality of plastic and this helped to cut down on the waste

Smart Co. operates a just-in-time (JIT) system and hence carries very little inventory

The production manager at Smart Co is responsible for all purchasing and production issues which occur. Smart Co uses standard costing and usually, every time a design change takes place, the standard cost card is updated prior to production commencing. However, the company accountant responsible for updating the standards has been off for the last two months. Consequently, the standard cost card for the new dress has now been updated.

Question: Analysis of how actual and standard costs control variances. Evaluate the advantages and disadvantages of different types of variances.