Within the manufacturing processes there are differences that occur between what the official Accounting records show for materials used versus what the Production Departments report. These differences are referred to as “Material Variances”. Variances are a valuable Operations Management tool for measurement, analysis, waste/cost reduction, and control.
Terms:
Inventory Disappearance: Beginning physical inventory, plus receipts, minus ending physical inventory (official Accounting numbers).
Reported Production Usage: Production records of materials used; reported by Production Departments to Accounting.
Material Variance: The difference between Inventory Disappearance and Reported Production Usage.
Variance can be either unfavorable or favorable. (Think about this.)
Note: Variances can be calculated for labor and overhead as well as materials
Material Variance Problem
For a given month Konway Kola Kompany produced 93,872 cases of product (24 bottles each case) as reported by the Production Departments.
Empty bottles from official Accounting records:
Beginning physical inventory 115,865
Purchases during the month 2,304,000
End of month physical inventory 99,450
Your assignment is to calculate:
The reported usage of bottles, per production reports
The inventory disappearance, per Accounting numbers?
The empty bottle variance for the month – calculate both the number of bottles and the percentage of inventory disappearance?