Direct and Overhead Costs Variance Analysis

During the month of September (the last
month of Swiss Chocolate’s fiscal year), Steve Smith calculated the
production volume variance for the month, noting a significant favorable
variance resulting from increased production. In fact, despite the lack
of change in the sales forecast for the entire year, production had
increased 20% for the month. Smith was concerned with the outcome and
requested a meeting with Rick White, the plant manager.

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White indicated that indeed, he had
directed the production department to increase manufacturing for the
period. Although White indicated that the rationalization for increased
production was the approach of the holiday season and increased orders
which would be shipping soon, Smith was concerned that he had another

  • What was the effect of the production volume variance on plant operating income?
  • If White’s bonus is based on operating income, what concerns should Smith have at this point?
  • Were White’s directives justified?