Curtailing cost

           Curtailing cost

Curtailing cost is simply to cut the cost of production. When manufacturing considerations are up for discussion the ability to save on cost to make a better profit is always at the forefront of the discussion. However, when the cost is cut it should not be done at the expense of the quality. To curtail costs, the consideration of finding more feasible vendors, distributors, or products and materials is necessary. The profit margin should not be depleted for lack of quality when the cost has been cut in one area and therefore the production is often defective or inadequate products.

Curtailing cost can be seen in many areas from products to personnel. If the budget is in need of slashes the overhead cost has to be cut. When looking at personnel there should be a discussion about layoffs, compensation, or some other method to reduce staff. The same is true to cutting cost in production. However, there are some areas where the curtailing cost will have an overall adverse effect on the effectiveness. Using the social exchange theory in connection with cost reduction can improve performance and residue governance in relationships. Distributive justice is linked to the opportunism, whereas procedural justice interaction and justice perceptions are negatively seen as weak in comparison. To maintain a formal structure in this scenario it is important to have confirmed the formal structure of exchange for the informal mechanisms of interaction is enhanced in the performance and the reduction of cost (Yadong Luoa, 2015). Anytime this is the seen the interaction justice will show a negative view of opportunism, which will also be reflective of the related performance associated with the cost reduction.

Good Times Company Variance

            From our analysis of the total materials variance, the material price variance, and the material quantity variance our analysis is as follows. The total material variance is examining the difference between the standard cost of materials that resulted from production and the actual costs that were incurred (Direct material variance, 2018). The total materials variance was calculated as:

($25 actual cost-$22.50 standard cost) *12,000 units purchased

This resulted in a variance of $30,000. This variance is unfavorable, however there is no additional data to compare it to. The purchase price was higher than the standard cost which could mean that the quality of the material was better and that the organization can charge more for the product. The purchasing manager would be in charge of the total material variance, so he needs to evaluate his choice of materials better if the organization is not going to charge more for the items.

The material quantity variance is an examination of the difference between the actual amount of materials used in production and the amount the was expected to be used (Material quantity variance, 2017). There are numerous reasons that there is a material quantity variance, but in The Good Times Company scenario the organization used less material than was expected. It was calculated as:

(3 lbs actual usage- 3.5 standard usage) * $22.50 per pound standard cost

The result was 11.25 lbs. The variance seems high, but it can yield unusual results because it is, “based on a standard unit quantity that may not even be close to the actual usage” (Material quantity variance, 2017). The engineering department is responsible for the material quantity variance and it is based off the material that should basically be used in theory and the allowances for scrap material. It was calculated as:

(3 lbs actual usage- 3.5 standard usage) * $22.50 per pound standard cost

Finally, the material price variance is the examination of the difference between the actual price it costs to acquire direct materials and the budgeted price, multiplied by the actual number of the units acquired (Direct material price variance, 2017). The calculation is as follows:

($25 actual price- $22.50 budgeted price) * 3 lbs actual quantity

The results were $7.50 per lb. This seems unfavorable This method is one of the two that are used to monitor direct materials, thus it tracks the differences in raw material prices. There are different people who can cause a materials price variance. This high of a material price variance could be a result of a material shortage, discount application, new supplier, rush basis, or volume assumption (Direct material price variance, 2017).

 

Conclusion

Variance analysis is important to assist with managing budgets by controlling budgeted versus actual costs. Cost reports provide quantitative data about expenses, revenue and remaining inventory levels. Variances between planned and actual costs might lead to adjusting business goals, objectives or strategies.

 References

Direct material variance. (2018, January 29). Retrieved from, https://www.accountingtools.com/articles/what-is-the-direct-material-variance.html

Material quantity variance. (2017, September 15). Retrieved from, https://www.accountingtools.com/articles/what-is-a-material-quantity-variance.html

Yadong Luoa, Y. L. (2015). Improving performance and reducing cost in buyer-supplier relationships: The role of justice in curtailing opportunism. Journal of Business Research 68(3), 607-615

 

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