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Chaff Co: Manager Performance using variances matl labour

Chaff Co processes and sells brown rice. It buys unprocessed rice seeds and then, using a relatively simple process, removes the outer husk of the rice to produce the brown rice. This means that there is substantial loss of weight in the process. The market for the purchase of seeds and the sales of brown rice has been, and is expected to be, stable.

Comment on the performance of the purchasing manager, the production director and the maintenance manager using the variances and other information described below and reach a conclusion as to whether or not they have each performed well.

Chaff Co uses a variance analysis system to monitor its performance.

There has been some concern about the interpretation of the variances that have been calculated in month 1.

1. The purchasing manager is adamant, despite criticism from the production director, that he has purchased wisely and saved the company thousands of dollars in purchase costs by buying the required quantity of cheaper seeds from a new supplier.

2. The production director is upset at being criticised for increasing the wage rates for month 1; he feels the decision was the right one, considering all the implications of the increase. Morale was poor and he felt he had to do something about it.

The variances for month 1 are as follows:
Material price 48,000 (Fav)
Material usage 52,000 (Adv)
Labour rate 15,000 (Adv)
Labour efficiency 18,000 (Fav)
Labour idle time 12,000 (Fav)
Sales price 85,000 (Adv)
Sales volume 21,000 (Adv)

Fav = Favourable, Adv = Adverse
Chaff Co uses labour hours to absorb the variable overhead.

Solution Preview

Purchasing Manager: It is not clear that the lower prices goods are really improving results. While the material price variance is favorable by 48,000, the usage variance is unfavorable by 52,000. It could be that they have to throw out unusable materials or the loss of weight is more than a higher grade of raw materials. This experiment needs to be conducted to be sure the ...

Solution Summary

Your discussion is 192 words and explains that one manager performed well but the other likely did not. Reasons are provided.