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Direct material efficiency variance:
The calculation shows that Sneakers Unlimited evidenced an unfavourable direct material efficiency variance worth $ 600.00.
It is noted that Sneakers Unlimited can evidence such an unfavourable direct material efficiency variance for three broad reasons.
First of all, there might have been inferior quality materials used. Now, from the given information, it is noted that they purchased a new type of material from the current supplier, which is of high quality. This indicates that inferior-quality materials are not responsible for such unfavourable variance.
Secondly, there might have been an equipment failure. In this context, it is noted that no such incident has taken place. In fact, a change was made in the layout of the manufacturing space, which should reduce the standard time per product in the long run. So, it is also not the reason for such an unfavourable variance.
Finally, there might be an event related to upfront standard, which indicates that more materials were used than budgeted. From the given information, it is noted that during the period 1600 units of direct material were used, whereas only the 1550 units were considered as the standard level. Hence, this might be the possible reason for such unfavorable variance(Cooper and Suver, 1992).
[ii] Direct Labor efficiency variance:
The calculation shows that Sneakers Unlimited evidenced an unfavorable direct labor efficiency variance of worth $ 4650.00.
It is noted that Sneakers Unlimited can evidence such an unfavourable direct labour efficiency variance for two broad reasons. First, new inefficient work might be forced into production.
The organization’s information indicates that in the past, the company seldom had cost overruns due to labour inefficiency. Therefore, this is not responsible for such an unfavourable variance.
Secondly, there might require more hours than standard to complete the job. It is the fact that during the operation, the company employed 2480 hours for executing the operation, whereas only 2325 hours were considered as the standard level. So, this might be the possible reason for such unfavorable variance.
[iii] Variable Overhead efficiency variance:
The calculation shows that Sneakers Unlimited evidenced an unfavourable variable overhead efficiency variance of $ 697.50.
The given information indicates that the organization has changed the layout of the manufacturing process to reduce the standard production time in the long run.
However, in the short run, this adversely affects the production time, mainly because of the new system’s adaptability. This might be the possible reason for such an unfavourable variance(Dwommor, 2012).
[i] Explanation of fixed overhead variance:
Fixed overhead variance is calculated to explore the deviation in the fixed production cost during the operation from its budget. Thus, the calculation of the fixed overhead variance follows the below-mentioned formula:
Fixed overhead variance = Actual fixed overheads – Budgeted fixed overheads.
From the given calculation, it is noted that the fixed overhead variance of Sneakers Unlimited is – $ 600.00, which is favourable. As it is favorable, the management thoughts that everything is ok.
But in reality, it is not true. Fixed overhead costs are not typically driven by activity, and therefore, Sneakers Unlimited cannot attribute any part of this variance to the efficient (or inefficient) use of labor. In fact, there is no efficiency variance for fixed overhead.
[ii] Consequences:
It is noted that Sneakers Unlimited started to use these costing information extensively for other decision making purposes. Since, the fixed overhead variance is not driven by activity, the organization might generate a biased decision related to both production as well as pricing of each of products produced by the organization.
Further, the organization aims to reduce costs. Hence, such favorable fixed overhead variance did not produce fruitful results.
PART C: Discussion
As shown in the schedule 6, the overhead charged to the “Dance” shoes using ABC is $ 16.98 and significantly lower than the $ 18.75 calculated under the traditional method. Here, the overhead cost for “Dance” shoes is a more precise cost for taking decision about both pricing as well as production of this shoe.
Again, for “Run” shoes, the overhead calculated is $10.73 per unit as per the ABC method and $ 12.50 per unit as per the traditional method. This also indicates that there is a significant reduction in the overhead cost will be evidenced, if theSneakers Unlimited employed ABC costing techniques.
Finally, for “walk” shoes, the overhead calculated is $ 29.46 per unit as per the ABC method and $ 22.50 per unit as per the traditional method. Here, the per unit overhead cost is much more as per the ABC costing than the traditional costing.
In order to find out the reason for such differences, it can be said that the traditional method measuresthe allocation of cost on the basis of direct labor dollars only.
As a consequence, there will be comparatively more overhead costs if the product requires high direct labour dollars compared to a product with a relatively low level of direct labour dollars(Hopper and Major, 2007).
At the same time, if the traditional costing method is employed, which indicates only direct labour dollars are considered to assign overhead, certain factors such as the number of orders, setups, and even the product tests will not impact the allotment of overhead costs.
On the other hand, it is significant that if Sneakers Unlimited intended to employ the ABC costing techniques, then it will endow with a supportive hand to assign costs in a more appropriate manner as using this technique, the level of per unit overhead costs are not assigned at the same rate as direct labour dollars(Kaplan and Anderson, 2004).
It is also true that, according to the nature of the ABC costing technique, the more activities there are, the more complex it will become to calculate per unit overhead cost(Myers, 2009).
In real life, various technologies need to be incorporated to enable systems for adapting ABC systems as a costing technique(Maiga and Jacobs, 2003). In this context, several organizations restrict the number of activities required in the costing system to make it convenient.
Hence, it can be said that though the incorporation of the ABC costing technique may result in certain assignments being subjective, it does afford a more precise estimation of costs for adapting management decisions.
So, Sneakers Unlimited is recommended to adopt the ABC costing system as the new costing technique.
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