Financial Performance Management

FINANCIAL
PERFORMANCE
MANAGEMENT

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................3
a. Cost on basis of absorbing all overheads based on labour hours............................................3
b. Calculation of cost on basis of activity based costing.............................................................4
c. Critical evaluation of result.....................................................................................................5
d. Sensitivity analysis helping manager in coping with uncertainties........................................6
QUESTION 2...................................................................................................................................6
a. Calculation of variance............................................................................................................6
b. Problem with current system of calculating and reporting variances for assessing
performance................................................................................................................................8
QUESTION 3...................................................................................................................................9
REFERENCES..............................................................................................................................11

QUESTION 1
a. Cost on basis of absorbing all overheads based on labour hours
Lipstick Lip-balm Lip-gloss
Units 30000 35000 3000
Revenue 660000 910000 72000
Cost of material 150000 350000 30000
Cost of labor 450000 350000 30000
Overhead Costs 124698.795 96987.952 8313.253
(Based on Labor Hours)
724698.795 796987.952 68313.253
Net Profit/ Loss (64698.795) 113012.048 3686.747
C.pu 24.16 22.77 22.77
Total Cost per unit Lipstick Lip-balm Lip-gloss
Selling Price 22 26 24
Cost per unit 24.16 22.77 22.77
Profit/Loss per unit (2.16) 3.23 1.23
Calculation of Absorption rate based on labor hours
Setup Costs 120000
Receiving Costs 30000
Dispatch 15000
Machining 65000
Total 230000
1.38554217
Total Labor Hours 166000
Overhead Cost 230000
Overhead Absorption Rate 230000/166000
(Based on Labor Hours) 1.3855
Particular Lipstick Lip-balm Lip-gloss
Total Labor Hours 90000 70000 6000
Absorption Rate 1.3855 1.3855 1.3855
Overhead Costs 124698.80 96987.95 8313.25

b. Calculation of cost on basis of activity based costing
Cost per unit using the ABC Costing
Cost Drivers
Cost Pools Cost Drivers
Setup Costs 120000 25 Production runs (10+14+1)
Receiving Costs 30000 22 purchase costs (10+10+2)
Dispatch 15000 50 deliveries (20+20+10)
Machining 65000
272000 machine
hours (120000+140000+12000)
Total 230000
Cost per set up 4800
Cost per receiving 1363.64
Cost per delivery 300
Cost per machine hour 0.2390
Particular Lipstick Lip-balm Lip-gloss
Units 30000 35000 3000
Setup Costs 48000 67200 4800
Receiving Costs 13636.36 13636.36 2727.27
Dispatch 6000 6000 3000
Machining 28676.47 33455.88 2867.65
Total 96312.83 120292.25 13394.92
Overhead Cost per unit 3.210 3.437 4.465
Total Cost per unit Lipstick Lip-balm Lip-gloss
Material Cost 5 10 10
Labor Cost 15 10 10
Overheads 3.210 3.437 4.465
Cost 23.21 23.44 24.46
Total Cost per unit Lipstick Lip-balm Lip-gloss
Selling Price 22 26 24
Material Cost 5 10 10