Cost accting#6

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.

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 motive.

• 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?