Variance Interpretation

• Vanadium Audio Inc. is a small manufacturer of electronic musical instruments. The plant manager received the following variable factory overhead report for the past month of operations:

  Actual units produced: 15,000 (90% of practical capacity)

  The plant manager is not pleased with the $12,320 unfavorable variable factory overhead controllable variance and has come to discuss the matter with the controller. The following discussion occurred:

  Plant Manager: I just received this factory report for the latest month of operations. Im not very pleased with these figures. Before these numbers go to headquarters, you and I need to reach an understanding.

  Controller: Go ahead. Whats the problem?

  Plant Manager: Whats the problem? Well, everything. Look at the variance. Its too large. If I understand the accounting approach being used here, you are assuming that my costs are variable to the units produced. Thus, as the production volume declines, so should these costs. Well, I dont believe these costs are variable at all. I think they are fixed costs. As a result, when we operate below capacity, the costs really dont go down. Im 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 youre a team player. You really need to reconsider your assumptions on this one.

• Assume you are the controller. Write a memo responding to the plant manager.