Variance - A common scenario Mike manages a production...

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A common scenario Mike manages a production facility for Amalgamated Widgets, Inc. Under him are the following departments: purchasing, production, warehousing and shipping, maintenance and security. Mike gets a bonus each year, depending on how well he manages the production facility. He also has the authority to give bonuses to employees working under him when they meet or exceed performance goals. Mike, and his management team, use a standard cost system. They have determined the quantities possible, and the cost components of their products, under normal conditions. Costs are divided into the following categories: Direct Materials, Direct Labor and Factory Overhead. The factory incurs no Selling or G&A (General and Administrative) expenses. All their costs relate to producing products. A product's standard cost, is what it should cost to make the product. At the start of each month a production budget is prepared, using standard costs and estimated production quantities. At the end of each month a variance report is prepared to compare the production budget with the actual quantities and costs of production. The variance report tells Mike and his managers how well they did at achieving their budget goals. A favorable variance shows that actual costs are less than budgeted (standard) costs. An unfavorable variance is just the opposite - actual costs are greater than budgeted costs. By using a budget the management team can estimate their future costs and cash needs, plan production, schedule
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Variance - A common scenario Mike manages a production...

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