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Problem-3-2
Chaff Co processes and sells brown rice. It buys unprocessed rice seeds and then, using a relatively simple
process, removes the outer husk of the rice to produce the brown rice. This means that there is substantial
loss of weight in the process. The market for the purchase of seeds and the sales of brown rice has been, and
is expected to be, stable. Chaff Co uses a variance analysis system to monitor its performance.
There has been some concern about the interpretation of the variances that have been calculated in month 1.
The purchasing manager is adamant, despite criticism from the production director, that he has purchased
wisely and saved the company thousands of dollars in purchase costs by buying the required quantity of
cheaper seeds from a new supplier.
The production director is upset at being criticized for increasing the wage rates for month 1; he feels the
decision was the right one, considering all the implications of the increase. Morale was poor and he felt he
had to do something about it.
The variances for month 1 are as follows:
Amount in $
Material price 48,000 (Fav)
Material usage 52,000 (Adv)
Labour rate 15,000 (Adv)
Labour efficiency 18,000 (Fav)
Labour idle time 12,000 (Fav)
Variable overhead expenditure 18,000 (Adv)
Variable overhead efficiency 30,000 (Fav)
Fixed overhead expenditure 8,000 (Fav)
Sales price 85,000 (Adv)
Sales volume 21,000 (Adv)
