An Analysis of Cool Rides' Market-Size and Material Price Variances

According to the case study, Cool Rides experienced a negative Size-Market Variance (SMV) of $391,050.4 for Skis due to lower actual sales compared to target sales. However, they gained a favorable SMV of $412,312.16 for Snowboards as actual sales exceeded standard units by 1,200 units. This resulted in a total positive SMV of $21,261.76. Additionally, the report highlights material price and quantity variances, emphasizing the importance of effective forecasting to meet short-term and long-term obligations.

Case Study (Management Accounting)
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Table of Contents
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INTRODUCTION................................................................................................................................3
TASK 2.................................................................................................................................................3
A. Preparation of flexible budget.....................................................................................................3
B. Calculations of variances............................................................................................................3
TASK 3.................................................................................................................................................7
Analysis of variances.......................................................................................................................7
CONCLUSION....................................................................................................................................9
REFERENCES...................................................................................................................................10
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INTRODUCTION
Management accounting is the process of analysing and evaluating financial information so
as to take strategic and effective quality of decisions. The present report lay emphasizes on
budgeting and its comparison with actual performance for variance evaluation and thereby make
decisions for performance improvements.
TASK 2
A. Preparation of flexible budget
Particulars Original Actual variance Type
Skis 15000 13600
Snowboards 10500 11200
Sales (Skis)
$13,500,000.0
0
$13,056,000.0
0 $444,000.00 Adverse
Snowboards $8,820,000.00 $9,856,000.00 -$1,036,000.00 Favorable
Total
$22,320,000.0
0
$22,912,000.0
0 -$592,000.00 Adverse
Direct material (Skis) $4,566,000.00 $4,061,096.00 $504,904.00 Favorable
(Snowboards) $2,631,300.00 $2,484,384.00 $146,916.00 Favorable
Direct labor (Skis) $990,000.00 $1,166,880.00 $423,000.00 Adverse
(Snowboards) $567,000.00 $776,160.00 -$1,440,000.00 Adverse
Variable overheads (Skis) $2,007,000.00 $1,771,941.00 $235,059.00 Favorable
(Snowboards) $1,239,840 $1,178,901 $60,939.00 Favorable
Fixed overheads (Skis) 1,940,000 1,883,000 $57,000.00 Favorable
Snowboards 1,239,840 1,910,000 -$670,160.00 Adverse
Total cost
$59,820,980.0
0
$61,056,362.0
0 -$1,235,382.00 Favorable
B. Calculations of variances
Sales mix variance
Formula = (Actual quantity sold – Unit sales at standard mix)* budgeted contribution each unit
Calculation of sales standard mix
Standard sales unit
skis 15000
Snowboards 10500
Total 25500
Sales mix (skis) 59%
(Snowboards) 41%
Sales quantity in proportion to standard mix
Actual units sold Calculations Total
skis 13600
Snowboards 11200
Total 24800
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Standard sales mix (skis) (24800*59%) 14588
(Snowboards) (24800*41%) 10212
Calculation of sales mix variance
Particular skis Snowboards Total
Actual sales quantity 13600 11200 24800
Units sales at standard mix 14588 10212 24800
Differences -988 988 0
Standard contribution per unit 395.8 417.32
Sales mix variance -391050.4 412312.16 21261.76
According to the above mentioned budgets, it has been found that sales mix variance for skis
is -391050.4 whereas snowboards has positive variance 412312.16. Accordingly total variance for
the given data series is 21261.76. Thus, performance of skis is not up the the market where
management can focus to improve the same by taking appropriate action.
Sales quantity variance
Formula = (Budgeted sales – Unit sales at standard mix)* budgeted contribution
Sales quantity variance
Particulars Skis Snowboards Total
Budgeted sales quantity 15000 10500 25500
Units sales at standard mix 14588 10212 24800
Differences 412.00 288.00
Standard contribution per unit $395.80 $417.32
Sales quantity variance $163,069.60 $120,188.16 $283,257.76
Market – size variances:
Formula: (Actual market-size in units – budgeted market-size in units)*budgeted market share*
budgeted profit per unit
Particulars Skis Snowboards
Actual market-size in units 97143 86154
Budgeted market-size in units 100,000 131250
Budgeted market share 15% 8%
Budgeted contribution per unit 396 417
Market - size variance -169,620 -1,505,557
Market – share variance:
Formula = Actual market size (Actual market share% - Standard market share %)*budgeted cont.
per unit
Particulars Skis Snowboards
Actual market-size in units 97143 86154
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Budgeted market share % 15% 8%
Actual market share % 14% 13%
Budgeted contribution per unit 396 417
Market - size variance 384,500 -1,797,681
Sales price variance = Actual sales revenue – Actual sales at standard value
Particulars skis Snowboard
Actual revenue $13,056,000.00 $9,856,000.00
Actual units sold 13600 11200
Standard selling price $900.00 $840.00
Actual units sold at standard selling price $12,240,000.00 $9,408,000.00
Sales price variance $816,000.00 $448,000.00
According to the above mentioned budget, it has been found that sales price variance of skis
816000 whereas for snowboard it is 448000. It reflects that actual and standard price is varying for
both of aspects. It is showing that, prediction of corporation is not appropriate whereby cost of
production is increasing. It is affecting overall performance of the corporation to a great extent.
Owing to this, suitable action can be taken to contact appropriate suppliers.
Material price variance
Formula = (Actual cost of material) - (Standard cost of actual quantity used for production)
Particulars skis Snowboards
Actual cost of material
Timber $979,200.00 $564,480.00
Fiberglass $2,496,960.00 $1,523,200.00
Metal Alloy $584,936.00 $396,704.00
Total actual cost of material $4,061,096.00 $2,484,384.00
Actual material purchased at standard
price 4588640 2795520
Material price variance -$527,544.00 -$311,136.00
Material quantity variance:
Formula: (Actual quantity at standard cost – Standard cost of material at standard price)
Particulars Skis Snowboards
Actual quantity at standard cost $4,588,640.00 $2,795,520.00
Less: Standard cost of material $4,566,000.00 $2,631,300.00
Material quantity variance $22,640.00 $164,220.00
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Calculation of labour rate variance
Formula: (Actual labour hours*actual rate) – (Actual labour hours * Standard rate)
Particulars Skis Snowboards
Actual labor hours 388960 258720
Actual rate per labor hour $3.00 $3.00
Actual cost of labor $1,166,880.00 $776,160.00
Actual labor hours 388960.00 258720.00
Standard rate per hour 2.2 1.8
Standard cost of actual hours $855,712.00 $465,696.00
Labor rate variance -$311,168.00 -$310,464.00
Calculation of labour efficiency variance
Formula: (Actual labour hours*standard rate) – (Standard labour hours * Standard rate)
Particulars Skis Snowboards
Actual labor hours 388960 258720
Standard rate $2.20 $1.80
Standard cost of actual hours $855,712.00 $465,696.00
Standard labor hours 450000 315000
Standard rate $2.20 $1.80
Standard cost $990,000.00 $567,000.00
Direct labor efficiency variance $134,288.00 $101,304.00
Variable overhead variance for each category of Skis
Particulars Standard Actual Variance Type
Indirect materials 913,200 730,997 182,203 Favorable
Indirect labor 495,000 636,480 -141,480 Adverse
Utilities 96,000 60,384 35,616 Favorable
Machine setups 34,800 44,880 -10,080 Adverse
Other 288,000 163,200 124,800 Favorable
Selling and Distribution 180,000 136,000 44,000 Favorable
Total 2,007,000 1,771,941 235,059 Favorable
Variable overhead variance for each category of Snow boards
Particulars Standard Actual Variance Type
Indirect materials 526,260 447,189 79,071 Favorable
Indirect labor 302,400 423,360 -120,960 Adverse
Utilities 75,600 46,872 28,728 Favorable
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Machine setups 26,880 32,160 -5,280 Adverse
Other 198,450 128,520 69,930 Favorable
Selling and Distribution 110,250 100,800 9,450 Favorable
Total 1,239,840 1,178,901 60,939 Favorable
Fixed overhead variance for each category of Skis
particulars Standard Actual Variance Type
Machine Maintenance 250,000 140,000 110,000 Favorable
Machine Repairs 80,000 220,000 -140,000 Adverse
Advertising 150,000 90,000 60,000 Favorable
Marketing 100,000 93,000 7,000 Favorable
Selling and Distribution 970,000 890,000 80,000 Favorable
Administrative* 390,000 450,000 -60,000 Adverse
Total 1,940,000 1,883,000 57,000 Favorable
Fixed overhead variance for each category of Snowboards
particulars Standard Actual Variance Type
Machine Maintenance 180,000 90,000 90,000 Favourable
Machine Repairs 60,000 160,000 -100,000 Adverse
Advertising 212,000 304,000 -92,000 Adverse
Marketing 96,000 124,000 -28,000 Adverse
Selling and Distribution 840,000 782,000 58,000 Favourable
Administrative* 390,000 450,000 -60,000 Adverse
Total 1,778,000 1,910,000 -132,000 Adverse
TASK 3
Analysis of variances
Labour rate variance: This variance measure the differences between actual cost of labour
and the budgeted cost of direct labour hours used for the production (Arroyo, 2012). Cool Rides has
negative LRV for both the Skis and Snowboards to $311,168 and $310,464 respectively. It is mainly
because actual labor cost per hour is comparatively higher to $3; however, budgeted price was $2.2
and $1.8 respectively. It indicates that in the market, workers demanded excessive wages resulted
increase in total labor cost. In order to eliminate it, Cool Ride’s hotel decided to recruit less number
of skilled and experienced employees for larger production and thereby meet target goals (Hiebl,
Feldbauer-Durstmüller and Duller, 2013). By recruiting qualified and talented workforce, company
will be able to deliver best quality goods to the customers and satisfy their demand and
expectations.
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Labor efficiency variance: This variance measure the efficiency level of the workers that
how much they are efficient to manufacture top-quality goods and services within decided time
(Hopwood, Unerman and Fries, 2010). According to the results, it can be seen that Cool Rides Ltd
has favorable variance of $134,288.00 and $101,304.00 respectively that indicates that workers utilized
less hours to produce target quantity goods. In the cited case, budgeted labor hours were 450000 and 315000
whilst employees used only $388960 and 258720 hours. It revealed that labor are efficient and highly skilled
and produced goods by consuming lower hours as compare to set targets. It helps to reduce.
Due to negative LRV and positive LEV, total labor cost of Cool Rides got improved from $990,000
to $1,166,880 and resulted negative variance of $176880 which is not good. Therefore, management
has to recruit highly committed and experienced workforce in required quantity to manage their
wages expenditure to the maximum of set targets.
Sales mix variance: This variance helps to determine the changes in contribution due to
varying the proportion of different products in sales mix (Håkansson, Kraus and Lind, 2010). As per
the observed figures, it can be seen that on Skis, Cool Rides has negative SMV amounted to
$391050.4 due to less actual sale of $14588 than that of target sales of 14588. However, on Snowboard, it
gained favorable variance of $412312.16 because actual sale is 11200 units more than standard units of
10212. Thus, it can be said that Cool Rides sold 988 units more of Snowboard and less of Skis. In total,
positive SMV has been arisen of $21261.76.
Market–size-variance: This kind of variance helps to determine the effect of change in
market size on profitability. The aforementioned size variance reflects that market size variance for
skis is -169620 and share variance for the same is 384500. Apart from this, snowboards are also
having negative variance of size as -1505557 whereas share variance for the same is -1797681.
Material price variance: According to the above mentioned material price variance is
negative for skis and the same applies on Snowboard. It reflects that corporation should focus upon
forecasting effectively so as to take appropriate action in order to meet short as well as long term
obligation of the same (Cuganesan, Dunford and Palmer, 2012). It shows that price of skis is lower
than standard one and for snowboards the same situation applies. Owing to this, business needs to
focus upon forecasting effective and then accordingly management can take appropriate action to
follow the budget.
Material quantity variance: According to the above table it has been found that material
quantity variance of skis is 22640 whereas variance of snowboards is 164220. The obtained
variance is favourable which tends to support business. However, it reflects that corporation is not
estimating need of variance effectively hence they should focus upon taking right decision by doing
forecasting related to flow of production needed (What is management accounting, 2016).
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CONCLUSION
Report concluded that Cool Ride’s manager has to control its excessive cost through regular
monitoring. Further, marketing and other promotional campaign can be used to enhance its sales
and thereby reach goals.
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REFERENCES
Books and Journals
Arroyo, P., 2012. Management accounting change and sustainability: an institutional approach.
Journal of Accounting & Organizational Change. 8(3). pp.286-309.
Cuganesan, S., Dunford, R. and Palmer, I., 2012. Strategic management accounting and strategy
practices within a public sector agency. Management Accounting Research. 23(4). pp.245-260.
Håkansson, H., Kraus, K. and Lind, J., 2010. Accounting in networks. Routledge.
Hiebl, M. R., Feldbauer-Durstmüller, B. and Duller, C., 2013. The changing role of management
accounting in the transition from a family business to a non-family business. Journal of
Accounting & Organizational Change. 9(2). pp. 119-154.
Hopwood, A. G., Unerman, J. and Fries, J., 2010. Accounting for sustainability: Practical insights.
Earthscan.
Online
What is management accounting. 2016. [Online]. Available through: <
http://www.cimaglobal.com/About-us/What-is-management-accounting/>. [Accessed on 7th
October 2016].
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