Smoothie King bar engages in different business activities like selling fruit smoothies and batches of few flavors of high protein blend smithies sold throughout the day. The company has produced a new product named pick your smoothie system that allows clients to blend their smoothies, thus customize them according to their taste. The market and employees are highly receptive to the new system. However, there is a challenge in determining if the system will be efficient than the old one that allowed large batches' processing. It is critical to assess the system's efficiency to evaluate the efficient utilization of materials and labor. According to the company, efficiency variance that is more than 5% is not acceptable, and the company must readjust its operations to reduce such variances.
An in-depth analysis of the company's sales reveals that the store produced and sold 3000 smoothies using 285 pounds of protein blend and 150 hours of direct labor. The Standard quantity needed for a high protein smoothie is 0.1 pound of protein blend and 0.045 hours of direct labor. The company also uses the $3.0 per pound as the standard cost of protein blend and $12 per hour for labor. The efficiency variance for labor and direct material is computed using the following formula.
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Labor efficiency variance = (Actual DL hours –STD DL hours) X STD DL rate per hour.
Standard direct labour hours = 0.045 * 3000 = 135
Labour efficiency = (150 – 135)* 12
= 180 Unfavourable
Labour efficiency variance as a percentage = 180/3000*100 = 6%
Direct material efficiency variance = (Actual quantity – Standard quantity) X standard price
Standard quantity = 0.1*3000 = 300
= (285 – 300) X 3
= -45 Favourable
Efficiency variance for labor and direct materials shows that the company utilizes more labor hours to produce the same number of products. In this case, the variance is unfavorable since the actual direct labor is more than the standard. However, the 3000 smoothies used less material than the standard quantity meaning that the company can save on material costs. In this case, the variance is favorable since the company incurred less cost to procure the material for producing 3000 smoothies. The savings from material usage can offset the additional labor costs incurred to produce the smoothies. The management should be aware of this issue since it determines the new system's efficiency and its ability to realize the desired goals. Similarly, the system can enhance service delivery and customer satisfaction by allowing them to sample different ingredients and take responsibility for their decisions.
Variance analysis is a powerful tool used by the management to determine the outcome of a process and compare it with the set standards. The management use variance analysis for control purposes by identifying weaknesses in the current situation and taking corrective measures. In the current case, the company had an adverse and favorable variance, thus presenting an opportunity to re-examine the processes and procedures to identify any issues likely to derail a company's operations. Positive and negative variances offer insight into the management and contribute to improved management decisions. The company can understand its internal processes and adjust its operations to address adverse efficiency variance.
Smoothie King National team should consider the variance analysis calculations and their impact on pursuing or not pursuing the system. It is critical to ensure that the entire company benefits from the investment through improved returns, diversification, customer satisfaction, and employee satisfaction. The company should relook its decision on the maximum allowable efficiency variance since it will outrightly affect the acceptance of the current project since it has a variance of 6%. However, the benefits accrued from cost savings on the material will reduce the discrepancies and contribute to an improved outcome for the entire company. Based on the current situation and customer acceptance of the system, the company will benefit from improved returns and more customers.
The management should examine the current structures and approaches for determining the standards to ensure that they are relevant to the current situation or if there is a need for any changes. The company should test the standards for effectiveness and, where possible, take corrective action to adjust them to the company's current needs. However, suppose the management determines that the standards are okay. In that case, it is critical to focus on the company's operations, including the workforce, to ensure that they are productive and use efficient and effective ways to achieve the company's objectives.
Based on the variance analysis, there is a need for performance re-evaluation to determine areas of weaknesses and approaches that can address identified issues. Similarly, it is critical to engage employees to understand any shortcomings that will lead to a more favorable efficiency variance. However, the variance analysis results might have weaknesses like inappropriate standards, a changing environment, employee training, and stakeholder engagement. Such shortcomings can affect the outcome of variance analysis; thus, it is wrong to base the decisions on the variance analysis without considering other factors' influence.
The management should engage relevant parties in identifying a remedy for the current shortcoming, including determining the best course of action to improve customer relationships, employee satisfaction, and improved working conditions. Similarly, it is necessary to engage all stakeholders in system development to get their buy-inns and contributions, reducing any form of resistance in the future. The company efficiency variance can provide insightful information for adjusting internal operations and other company activities to realize the desired outcome.
