CMA (IMA) Practice Test 14

Halvorsen Pump Works — third-quarter variance review

Halvorsen Pump Works casts and machines the VH-20 valve housing, its highest-volume product. The company uses a standard costing system, isolates the direct materials price variance when materials are purchased, and applies both variable and fixed manufacturing overhead on standard direct labor hours allowed for actual output. Normal capacity, which is also the denominator level for the fixed overhead rate, is 5,200 housings per quarter.

The third quarter did not go to plan. In July a strike closed Halvorsen's primary foundry supplier, and purchasing manager Elena Voss placed rush orders for bronze alloy with a backup supplier at a higher price, without the supplier qualification testing that company policy requires. The backup alloy proved more porous, and more castings than usual were scrapped at inspection. Quality control traced all of the excess scrap to porosity in the alloy; machining methods and crew handling on the line were unchanged.

To protect delivery dates, production supervisor Marcus Odom moved his most senior machining crew, which earns a higher wage than the standard rate, onto the VH-20 line for the whole quarter. Separately, the company's largest distributor postponed two large orders into the fourth quarter, so output fell short of the normal level.

The plant manager has asked for more than a list of numbers: he wants to know which decisions helped the quarter and which hurt it, and whether the plant should keep using the backup alloy and the senior crew now that the strike has ended.

Controller Priya Raman must explain the quarter's variances to the plant manager, assign responsibility for each one, and recommend what the plant should do in the fourth quarter. The standard cost card and the actual results for the quarter are shown below.