Variance analysis in accounting and business management

Accounting Costs - SunAir Boat Case

The following table shows details of SunAir Boat Builder's molding department's direct cost and overhead variances:

SunAir Boat Builders, Inc.

Detailed Cost Comparison (per boat hull)

Unit Cost per Unit Cost Actual Price Usage Amount Standard Actual Variance Quantity Variance Materials Glass Cloth (sq. ft.) 120 $

Glass Mix (lbs.) 40 $

Unit Cost per Unit Cost Actual Rate Efficiency Amount Standard Actual Variance Quantity Variance Direct Labor Mixing (hrs.) 0.5 $

Molding (hrs.) 1.0 $

Cost (hull) 1 $

The variances observed in the table above can be traced directly to the complexities of the mixing and molding procedure. Production of boat hulls, by its very nature, requires "a great deal of expertise, or 'eyeball'" according to the case study. The following are listed as factors which can affect this process: "too much or too little catalyst...too much or too little heat...failure to allow proper time for curing... [and]...spending too much time on adjustments to mixing or molding equipment." Therefore, care has to be taken to make sure that both materials (glass cloth and mix) and supervision time are not wasted. Unfortunately, variances did arise between the standard and actual costs.

In the materials category, more glass cloth (126 vs. 120 square feet) and mix (44 vs. 40 pounds) had to be used than expected. Also in the category of materials, although the cost per square foot of the glass cloth went down slightly (to $1.80 per square foot), the cost of the glass mix went up (to $4.09 per pound). In the labor category, although mixing took about as long as expected (.5 hours.), molding took.12 hours more time. In addition, the amount paid to labor for mixing rose to $21.37 from $20.25. And finally, the overhead costs were higher, having increased from $24.30 per boat to $25.91.

Question Two

Considering the business situation of SunAir, the setting of standard costs was the right choice to make. The nature of their product line dictated a seasonal production schedule. And in an effort to enhance "credibility with the bankers," improve general operations and possibly expand operations to include other sizes of boat to the product line, a well founded cost accounting system was vital. The company then decided to institute a standard cost system "to help control costs and to provide some reference for supervisor's performance."

Clearly the accounting department at the company (as well as management) needed a benchmark upon which to base their evaluation of the firm's costs and operations. Also, one has to assume that Randy Kern (molding department supervisor) and Bill Schmidt (the accountant) knew what they were doing when they chose the standards and so they must have a certain degree of legitimacy and meaningfulness. Likewise, President Jan Larson is certainly correct when he admits that: "Well, some variances are inevitable." Still there is some room for constructive criticism with regard to SunAir's choice of standard costs.

Given the complexities of the manufacturing process alluded to above, it is possible that the standards set by the accounting and molding departments were too rigid. After all, actual material amounts as well as the amount of labor needed to produce a hull are dependent on "eyeball" and "personalized" supervision. Therefore some flexibility is certainly needed on these production inputs. Fixing glass cloth at 120 sq. ft and glass mix at 40 lbs for each boat may have been too conservative. This is especially the case if batches of fiberglass are regularly "freezing" in their kettles. Some allowance must be made for this possibility.

Also, considering material price as fixed over long periods of time can be inaccurate. While the price of glass cloth at $2.00/square foot and glass mix at $3.75/pound may have been accurate when Randy Kern and Bill Schmidt first settled the issue, prices change on a regular basis. Perhaps the accounting department should check pricing of these inputs on a monthly or other more frequent basis. This type of regular update could considerably lower the observed variances.