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Qns:
A well known University Students Union decided to produce sweat shirts for its rag week. The original estimated sales and costs were:-
Selling price £10.00
Materials (each) £5.00
Labour (1/2 hour) £2.40 £7.40
Margin £2.60
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Actual results were
£ £
Sales (1,000 shirts) 12,400
Materials (1,120 shirts) 5,712
Labour (45 mins each) 4,200 9,912
Margin £2,488
Budgeted and actual sales were 1,000 sweat shirts .
The following points were relevant:
1. Due to high demand the Students Union sold the sweat shirts at £12.40, but a nearby University was selling its own similar sweat shirt at £14.00. This could have been equalled.
2. Labour rates also increased to £5.50 during the year, although the Students Union always paid below market rates.
3. Cotton shirts were chosen initially as they appeared to be cheaper than synthetic fibres. At the time of the budget cotton material was £5 per produced unit and synthetic £6. Efficient purchasing would have found synthetic available at £4.90 per unit. It should be noted that a degree of carelessness caused some sweat shirts to be wasted.
Required:
1. Compute appropriate traditional variances.
2. Prepare an analysis of variances, specific to this situation which will show the extent to which variances were due to operational or planning causes. (
3. Discuss the approach of the ex-post approach to variances, and its validity.
Solution:
Note: F- favourable
A- Adverse
£
1. Sales Volume Variance (1,000 - 1,000) -
Sales Margin Price Variance
[(12.40 - 7.40) - 2.60] 1,000 2,400 F
Material Price
(£5 - 5,712)) 1,120 112 A
1,120
Material Usage
(1,000 - 1,120) 5 600 A
Wage Rate
(4.80 - 5) 840 168 A
Labour Efficiency
[(1,000 x 0.5) - 840] 4.80 1,632 A
112 A
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Budget Margin 2.60 x 1,000 = £2,600
Actual Margin £2,488 112 A
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2. A B C
Original Plan £ Ex Post £ Actual £
Sales 1,000 x £10 = 10,000 1,000 x £14 = 14,000 1,000 x £12.40 = 12,400
Materials
cotton 1,000 x £5 = 5,000 1,120 x £5.10 = 5,712
synth. [1,000 x £6 = 6,000] 1,000 x £4.90 = 4,900
Labour 1,000 x1/2 x 4.80 = 2.400 1,000 x 1/2 x 5.50 = 2,750 1,120 x 3/4 x 5 = 4,200
Uncontrollable Planning Variances (A - B) £
Sales Price 4,000 F
Wage Rate 350 A
Material Price (substitution) 100 F
Operational Variances (B - C)
Sales Price 1,600 A
Wage Rate (1,120 x 3/4 x 0.5) 420 F
Labour Efficiency 340 x 5.50 1,870 A
Material Price 1,120 x 0.20 224 A
Material Usage 120 x 4.90 588 A
112 A
3. Traditional approaches include uncontrollable elements of environmental change, and also incorrectly values usage and efficiency differences.
However, classification into planning and operational are often arbitrary. Errors may occur in assessing ex-post standards, and subjectivity may effect the process. The methods can be costly and time consuming.
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