Peyton Approved Case Study

Budget variances have been recorded for Peyton Approved, which will show how well the company is running. To find variances a manager “will compare actual production costs to the standard costs” (Nobles et al., 2014). The determined variances for Peyton Approved are cost variances and efficiency variances. A cost variance “measures how well the business keeps unit costs of material and labor inputs within standards” (Nobles et al., 2014). To calculate cost variance, a manager would subtract actual cost per unit with standard cost per unit and then multiply by the actual quantity ((AC-SC) x AQ). For direct material variances, the cost variance manages to record the price variations among raw materials. In this case, Peyton Approved has no material price variance due to the budgeted price per unit of material and actual price per unit of material both being $7.75. This means that the variance is 0. It also shows that purchase division within this company has
been able to purchase the materials at budget prices. This also shows how well and effective this part of the business is functioning and performing, but even looking like effective management there is always a chance for more improvement. An efficiency variance “measures how well the business uses its materials or human resources” (Nobles et al., 2014).
This variance is calculated by subtracting the actual quantity of input used with the standard quantity of input allowed for the actual number of units produced times the standard cost per unit of the input ((AQ-SQ) x SC). This variance is favorable due to the budgeted quantities of material being 30,000 units and the actual quantity of materials used being 31,000. The favorable 7,750 efficiency variance shows how Peyton Approved was efficient when it came to the consumption of materials. This means that the manager of production had very good control over the consumption of material. The total material cost variance for Peyton Approved is favorable 7,750, which tells someone that the company was able to have efficient control of material costs and remain within standards. With good management of materials and opportunities available Peyton Approved looks to be heading in the right
direction. When it comes to direct labor variances the cost variance is favorable 33,000. This shows that Peyton Approved has been able to effectively and efficiently control labor rates. As seen in the labor variance, Peyton Approved has been able to pay less than the budgeted price for labor. The company has been able to save and be efficient with the cost variance, but when it comes to the labor efficiency variance it shows that the company’s production team has not done a great job at utilizing labor. This tells the company that there has been a waste of time regarding labor. The total labor variance for Peyton Approved is unfavorable $15,000. This shows that the operation and fee of labor rates were not efficient. Both cost variance and efficiency variance are helpful for Peyton Approved to see how well the company is performing, to help find any problems, and thoroughly analyze all data before making any decisions that could have an effect on the company. Plus, “good managers use variances as a guide for investigation, rather than merely to assign blame, and investigate favorable as well as unfavorable variances” (Nobles et al., 2014).