The vice president of production has just completed the January meeting with all production department heads. Everyone is upset that the production variances for the month were unfavourable. They do not understand why everything was unfavourable. January is typically the company's lowest production month of the year.
The company uses annual average unit costs for production evaluation purposes. The average costs are based on the prior year's actual performance with adjustments for any predicted changes in the coming year. Both production and economic items are considered in setting the averages for each new year.
Required:
Explain the problems with using average costs in evaluating production.

Question

Quizplus · Accepted Answer

The Answer of The vice president of production has just completed the January meeting with all production department heads. Everyone is upset that the production variances for the month were unfavourable. They do not understand why everything was unfavourable. January is typically the company's lowest production month of the year.
The company uses annual average unit costs for production evaluation purposes. The average costs are based on the prior year's actual performance with adjustments for any predicted changes in the coming year. Both production and economic items are considered in setting the averages for each new year.
Required:
Explain the problems with using average costs in evaluating production.

The Vice President of Production Has Just Completed the January