Managers often use variance analysis in employee performance evaluations for the following two attributes: effectiveness and efficiency. Our textbook authors, Datar and Rajan, wisely point out that it is important to understand the causes of the variance prior to utilizing it for performance management. Read the following scenario and respond to the questions following.
During the last quarter of FuturePrint's fiscal year, Jean Day, the CFO, calculated the production volume variance for the quarter, noting a significant favorable variance resulting from increased production. In fact, although there was no change in the sales forecast for the year, production had increased 30% for the quarter. Concerned that the company may now have a backlog of inventory to manage, Day met with Gerry Rick, the plant supervisor.
Mr. Rick indicated that he had directed the production department to increase manufacturing for the period. He indicated that the rationalization for increased production was that companies would have excess cash in their budgets at year end to replace existing printers with new, higher tech printers such as the ones made by FuturePrint. Day was not satisfied that this was the complete story.
- What was the effect of the production volume variance on plant operating income at year end, assuming none of the excess inventory was sold?
- What could have been a possible motivation for Ricks directive?
Your initial posting should be 250-500 words and must be submitted by Thursday, midnight, of this week.
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