Miracle Lights - Variation Analysis Paper

Introduction

By the request of Miracle Lights, Inc., Team B has prepared a variable analysis report with regard to the Brightlites product line. This analysis will be used to calculate the amounts and isolate the differences between actual costs and standard costs. From this information, the Miracle Lights management team will have the tools to implement changes to improve efficiency in the business operations. We will discuss several variances that we have discovered to have an unfavorable result which include price variance for raw materials purchased, direct labor rate, and variable overhead efficiency. The other variances, raw materials usage, direct labor efficiency and variable overhead spending had favorable results and we will provide the reasons for all the variances and give recommendations for improvement of the unfavorable outcomes.

Raw Materials Purchased

Description of Variance

A variance acknowledged after the purchase of raw materials that is caused by the differences between standard price and actual price of the raw materials utilized during the reporting period. This variance is utilized because organizations calculate and report raw materials at the time materials are procured as opposed to when they are utilized. Raw materials purchase price variance is fitting for when material inventories are maintained as opposed to procuring materials directly into production as in the just in time concept.

Reason for variance

The standard price of the raw materials is $6.80 and the actual price is $7.10, which resulted in a price variance being budget due to a $0.30 overage in the cost of raw materials; therefore, resulting in a total overage of $3,420, which is considered an unfavorable variance. Raw materials cost in producing a case of Brightlites is subject to change. The distributors and manufacturers of the raw materials may increase the cost based on economic standards for the materials in the marketplace, due to nature-related concerns, or as a result of their own business concerns. When the standard was developed, it may have been based on the raw materials prices for that time period but not considering changes that would impact the ultimate cost. Additionally, May 30 may have been during a holiday week (Memorial Day). This may have been a paid holiday for employees. If fewer cases were produced as a result of this holiday, there would be fewer cases to distribute the overall cost of producing the cases between, thus increasing the raw materials cost.

Recommendation to correct

If the materials that are purchased were routine purchases, it is recommended that establishing a long-term fixed price contract with suppliers would be in Brightlites' best interest, even if required, adding an economic price adjustment within the contract. Brightlites would then ensure that the variances between the standard price and the actual price paid would be minimal and