Variance Analysis  

 Variance Analysis

 Production volume variance is the measure of the units produced alongside the amount of overhead that was applied. It shows the difference between the number of units that were rendered against the number that was budgeted.  Variance analysis is also useful in measuring employee’s productivity because it is effective and efficient.  Variance is also helpful in helping the management establish whether the management is achieving its short term and long term financial goals (Fuller, C. M. et al. 2016). Future Prints Chief financial officer applied the method of analysis to their production systems and discovered increased production of printing machines. However, the market was not expected to rise with the same proportionality.

Every business aims to satisfy its customers’ needs promptly while at the same time minimizing the cost of production and delivery. In the case of Future print the demand was not expected to rise despite the plan supervisor directing the production department to increase production by 30 percent.   An increase in the volume of production without a corresponding increase in the market will result in an oversupply of printers to the market.  This means there will be excess be sold than it is necessary to meet the demand of the market. Increased supply leads to a reduction in the prices of products (Kouvelis, et al., 2018).

The cost of production becomes high, including the cost of labor.  The result will be poorly managed inventory and reduces profitability or even losses. Future Prints plant operating income will be drastically low.

During the quarter that there was overproduction, it is apparent that the company consumed more low materials than was necessary to produce the excess inventory. Since the market did not expand with the same proportionality that the demand increased, then all the funds spent to purchase the excess raw materials was a loss (Yan, Hui, et al., 2014). Therefore, the operating income will be low at the end of that period. It is important to note that accounting of inventory involves more than just its production cost.  The fact that Future prints had excess inventory means that they had to withhold it for a given period before they can sell all of its since they produced more than the market can absorb. The overproduction of printers has an impact on storage space. The manufactured printers had to be stored in a safe space that is free from any possible potential damage. This may attract an additional cost of labor and space. The printers have to be cleaned every day to ensure that they are free of dust or any other harm. Also, space can be used for other purses. As a result of overproduction, the company’s operating income of the year will suffer.

Variance analysis is used to gauge the employee’s productivity in a company because it is efficient and effective.  Mr. Rick, as the plant supervisor, might have been worried that the company may underestimate his potential to help boost its productivity (Yan, Hui, et al., 2014). The second possible reasons are that the company might have plans to lay off employees and replace them with more experienced ones. As the production supervisor, Mr. Rick might have been very close to those working under him, and therefore he pressed had to prove to the company that his team is competent enough. He might have over increased production volumes as a desperate measure to protect his staff. It is possible that as a production supervisor, Rick was utterly ignorant of the market variations. He concentrates on production, which was his area of specializations without minding that the printers will have to be sold (Fuller et al. 2016). The company might have installed new pieces of machinery to improve the production of printers, and therefore Rick may have been tempted to test the unique system’s ability. The availability of raw materials to the company could have induced the production manager to produced goods to the maximum potential of the company. The fact that raw materials, as well as other inputs such as labor, are available, the head of the production may be tempted to overproduce (Kouvelis et al. 2018). Mr. Rick reasoned that their customers would have reserved cash to buy printers such as the ones they are producing.  The mistake that Mr. Rick did was to use assumptions, which, according to Jean Day, the company’s Chief financial officer it was not valid.

Variance analysis is a competent tool to establish the performance of a business enterprise.  It is true that producing goods in large volumes decrease the cost as a result of economies of scale. Still, the production should never exceed the capacity of the available market. Mr. Rick did not understand the dangers of the overproduction of goods beyond the ability of the market. As a result, Future printers company will suffer from low operating income at the end of the production period.  The case of Future prints is a perfect demonstration of the importance of variance analysis to various business operations.