Material Price and Quantity

Answer A

Dysfunctional Behavior of Purchasing Managers

The Favorable price Variance Clearly indicates that the material purchased by the purchasing managers is at a cost lower than anticipated in the budget due to which the actual cost is below the budget and a favorable price variance is resulted. But on the same time the usage variance had gone down which shows that the material purchased at the lower price is not of the required standard quality which is further evidenced from the complains of the laborers that material quality is poor due to which the company is also loosing its sales . The purchasing manager is buying at lower cost because his remuneration would might be linked to the material cost which if exceeds budget would impair his performance .In order to manipulate his performance he is buying cheap material of lower quality so that his performance would appear to be good and the usage issue will be reflected in the production managers performance for which he is not accountable and hence his position would be secured. The over stocking of material is also one of the technique to get cheaper material as he is buying in bulk quantity to get discounts but the negative impact of this would be high inventory holding cost and the obsolete or damage of the inventory which again will not effect his own performance as he will be held responsible for purchasing the material and not for handling it.

Answer B

Improvement Idea To Make Procurement Effective

In order to stop the manipulation of purchasing managers performance and to establish a more effective and fair performance reporting system the variances should be considered in a combination and not separately .For example the Material variance should be considered as a whole to monitor the performance of the purchasing managers as it would reflect the true picture because even if he purchases poor quality material at cheaper prices that would be reflected because the total material variance would be unfavorable .The performance of Purchasing manager should not only be  linked to the prices he should be provided specific quality standards at a suitable prices and the evaluation should be done on the basis of that criteria including the material quality as well as quality is very important because it not only reflects the production function but the sales function will also have a negative impact .The overstocking can be controlled by defining re order levels and the minimum and maximum quantities in the system so that purchasing manager had to follow those levels and controls over inventory ordering and stocking will be effective making procurement function effective and beneficial for the company .