Ruthenium Electronics Co. Assembly Department Cost Problem Investigation: Analyzing Unfavorable Variances

This report investigates the cost problems in the Assembly Department of Ruthenium Electronics Co., a consumer electronics company. To begin the investigation, the following budget performance reports for the last quarter were obtained:

Ruthenium Electronics Co. - Assembly Department Quarterly Budget Performance Report

| | Standard Quantity at Standard Rates | Actual Quantity at Standard Rates | Variances | |-----------------|------------------------------------|-------------------------------------|-----------| | Direct labor | $157,500 | $227,500 | $70,000 U | | Direct materials | $297,500 | $385,000 | $87,500 U | | Total | $455,000 | $612,500 | $157,500 U|

The following reports were also obtained:

Ruthenium Electronics Co. - Purchasing Department Quarterly Budget Performance Report

| | Actual Quantity at Standard Rates | Actual Quantity at Actual Rates | Price Variance | |-----------------|------------------------------------|---------------------------------|----------------| | Direct materials | $437,500 | $385,000 | $(52,500) F |

Ruthenium Electronics Co. - Fabrication Department Quarterly Budget Performance Report

| | Standard Quantity at Standard Rates | Actual Quantity at Standard Rates | Variances | |-----------------|------------------------------------|-------------------------------------|-----------| | Direct labor | $245,000 | $203,000 | $(42,000) F | | Direct materials | $140,000 | $140,000 | $0 | | Total | $385,000 | $343,000 | $(42,000) F|

An interview with the Assembly Department supervisor revealed the following:

Q: What explains the poor performance in your department? A: 'Listen, you've got to understand what it's been like in this department recently. Lately, it seems no matter how hard we try, we can't seem to make the standards. I'm not sure what is going on, but we've been having a lot of problems lately.'

Q: What kind of problems? A: 'Well, for instance, all this quarter, we've been requisitioning purchased parts from the material storeroom, and the parts just didn't fit together very well. I'm not sure what is going on, but during most of this quarter, we've had to scrap and sort purchased parts - just to get our assemblies put together. Naturally, all this takes time and material. And that's not all.'

Q: Go on. A: 'All this quarter, the work we've been receiving from the Fabrication Department has been shoddy. I mean, maybe around 20% of the stuff that comes in from Fabrication just can't be assembled. The fabrication is all wrong. As a result, we've had to scrap and rework a lot of the stuff. Naturally, this has just shot our quantity variances.'

Analysis of Variance Reports:

The variance reports show that the Assembly Department had significant unfavorable variances in both direct labor and direct materials. The actual quantity of direct labor was much higher than the standard, resulting in a $70,000 unfavorable variance. The actual quantity of direct materials was also much higher than the standard, resulting in an $87,500 unfavorable variance.

The Purchasing Department's variance report shows that they purchased materials at a lower actual rate than the standard rate, resulting in a favorable variance of $52,500. However, the Assembly Department supervisor's comments about purchased parts not fitting well and needing to be scrapped and sorted suggest that the quality of the materials purchased may be poor, which could explain why the actual quantity of direct materials was much higher than the standard.

The Fabrication Department's variance report shows an unfavorable variance in direct labor, with the actual quantity being lower than the standard. However, the Assembly Department supervisor's comments suggest that the quality of the work from the Fabrication Department has been poor, which could explain why the actual quantity of direct materials was the same as the standard.

Conclusion:

Overall, the Assembly Department's poor performance can be attributed to a combination of poor quality materials from the Purchasing Department and poor quality work from the Fabrication Department, which resulted in a significant amount of scrap and rework. This led to higher actual quantities and unfavorable variances in both direct labor and direct materials.