Kretzinger Company makes extensive use of financial performance reports for each of its departments. Although most departments have been reporting favourable cost variances with the company's current inventory system, management is concerned about the overall performance of the purchasing and production departments. For example, the following information is for the purchasing of materials for a product the company has been manufacturing for several years:
Required:
a. Compute the inventory turnover for each year. Can any conclusions be drawn for a yearly comparison of the purchase price variance and the inventory turnover?
b. Identify problems likely to be caused by evaluating purchasing only on the basis of the purchase price variance.
c. Management has been relying almost exclusively on variances for performance measurement. What recommendations can you suggest to improve the evaluation process?

Question

Kretzinger Company makes extensive use of financial performance reports for each of its departments. Although most departments have been reporting favourable cost variances with the company's current inventory system, management is concerned about the overall performance of the purchasing and production departments. For example, the following information is for the purchasing of materials for a product the company has been manufacturing for several years:
  Required:
a. Compute the inventory turnover for each year. Can any conclusions be drawn for a yearly comparison of the purchase price variance and the inventory turnover?
b. Identify problems likely to be caused by evaluating purchasing only on the basis of the purchase price variance.
c. Management has been relying almost exclusively on variances for performance measurement. What recommendations can you suggest to improve the evaluation process?

Quizplus · Accepted Answer

The Answer of Kretzinger Company makes extensive use of financial performance reports for each of its departments. Although most departments have been reporting favourable cost variances with the company's current inventory system, management is concerned about the overall performance of the purchasing and production departments. For example, the following information is for the purchasing of materials for a product the company has been manufacturing for several years:
  Required:
a. Compute the inventory turnover for each year. Can any conclusions be drawn for a yearly comparison of the purchase price variance and the inventory turnover?
b. Identify problems likely to be caused by evaluating purchasing only on the basis of the purchase price variance.
c. Management has been relying almost exclusively on variances for performance measurement. What recommendations can you suggest to improve the evaluation process?

Kretzinger Company Makes Extensive Use of Financial Performance Reports for Each