Financial Performance Management (Online Exam)

This document provides information on financial performance management, including topics such as absorption costing, activity-based costing, sensitive analysis, and material usage variance. It also discusses the role of sensitive analysis in coping with uncertainties. The document includes questions and answers related to these topics.

FINANCIAL
PERFORMANCE
MANAGEMENT(ONLINE
EXAM)

Table of Contents
Question: 1...................................................................................................................................3
d) Role of sensitive analysis to cope with uncertainties..............................................................5
Question: 2...................................................................................................................................5
Material usage variance...............................................................................................................6
Material mix variance..................................................................................................................6
Total material yield variance ......................................................................................................6
Question: 3...................................................................................................................................6
REFERENCES................................................................................................................................1

Question: 1
Particulars lipstick lip-balm Lip-gloss
Production 30000 35000 3000
Direct material cost 5 10 10
Direct labour cost 15 10 10
Direct labour hours 3 2 2
Costs
Set up costs 120000
Receiving 30000
Despatch 15000
Machining 65000
Total overheads 230000
a)
lipstick lip-balm Lip-gloss
Production 30000 35000 3000
Direct labour hour per unit 3 2 2
Labour hours 90000 70000 6000
Total labour hours 166000
Overhead absorption rate
230000/166000
1.39
Absorption costing cost per unit as
follows:
Direct material 5 10 10
Direct labour cost 15 10 10
Overhead cost per unit 4.17 2.78 2.78

Total cost per unit 24.17 22.78 22.78
Profit/loss from lipstick= sales price – cost = 22 – 24.17 = (2.17) per unit
profit from lip-balm = 26-22.78 = 3.22 per unit
profit from lip gloss = 24-22.78= 1.22 per unit.
b) Using activity-based costing
Particulars Basis of apportionment lipstick Lip balm Lip gloss
Set up cost No of set up 40%
48000
56.00%
67200
4.00%
4800
Receiving cost No. of deliveries received 45.00%
13500
45.00%
13500
10.00%
3000
Despatching cost No. of order despatched 40.00%
6000
40.00%
6000
20.00%
3000
Machining cost Machine hours 120000
hrs.
44%
28600
140000
hrs.
51%
33150
12000
hrs.
5%
3250
Total overhead per product 96100 119850 14050
Production units 30000 35000 3000
Per unit overhead rate 3.2 3.42 4.68
Direct material cost 5 10 10
Direct labour cost 15 10 10
Cost per unit 23.2 23.42 24.68
Profit/loss from lipstick = sales price – cost per unit = 22-23.2 = (1.2)
profit from lip balm = 26 – 23.42 = 2.58
profit/loss from lip gloss = 24 – 24.68 = (0.68)

c) Absorption costing refers to the technique of proportioning the overall cost of product to each
and every product produced by the company. This is done to allocate indirect cost or
manufacturing overhead to each and every product produced by the company. On the other hand,
in activity-based costing, all the activities performed and their related cost are first gathered and
then these costs are allocated on different basis to each product on the basis of their proportion in
them or the benefit derived by them through the performance of that particular activity. By
adopting two techniques for calculating cost per unit by gathering all direct and indirect cost
occurred during the production of three different products, that is lipstick, lip balm and lip gloss,
we have first calculated direct cost per unit, and then calculated overhead rate per unit by
adopting various techniques like absorption costing and activity-based costing. By doing so, we
have analysed that in the techniques of absorption costing where it has been seen that profit
margin seems quite good where all the overhead costs are divided among three products on the
basis of labour hour worked towards their production. Under this technique of absorption costing
profit margin seems quite good. But on the other hand, we have seen that in adopting activity-
based costing the profit margin has been archived only in lip balm production while the other
product, that is lipstick and lip gloss resulted in per unit loss of 1.2 and 0.68 respectively. Under
the technique of absorption costing, we have first gathered all the direct cost and then divided
indirect cost on the basis of apportionment relevant for each and every different type of cost.
Thus, at last it can be said that for showing profitability of the concern, one must go for adopting
absorption costing on the basis of labour hours. But if, in order to decide upon what activity to be
performed and what should not or deciding upon minimizing cost associated with each and every
activity in order to reduce cost per unit, one may go for activity-based costing to undertake such
cost analysis.
d) Role of sensitive analysis to cope with uncertainties
Sensitive analysis is an accounting tool which help the management of the company to analyse
the what if situations arising in the company. With the help of sensitive analysis, managers get to
know how the operating income of the company change in case if their prediction is not come
true. The prediction of managers includes selling price, fixed cost, variable cost and volume of
sales in order to calculate the break-even point of the product and services of the company. The
CVP sensitive analysis also help the management to analyse the what if situation in order to
develop the understanding of internal and external performance of the company. Margin of

safety is known as the point where company are able to protect the business from declining
before it starts incurring fixed cost. For the purpose of CVP sensitive analysis margin of safety is
very important component. It is used to measure the level of risk. All sales above break-even
point is considered as MOS. So it helps the manager to know what if the fixed cost of the
company not remain same and how they affect the MOS of the company. The effect of CVP
analysis is that it helps the managers to define the cost structure of the company. It also helps to
know the relationship between fixed cost and variable cost by determining their proportions.
Managers also includes operating leverage into sensitive analysis in order to know the impact of
cost structure on profit of the company. With the help of sensitive analysis, managers understand
the performance of the company in a better way.
Question: 2

Material usage variance
(Standard quantity - actual quantity) * standard price per unit
Standard quantity:
Alpha= 1840(46 * 40)
Beta = 2760(46 * 60)
Gama = 920(46 * 20)
Alpha
= (1840 – 2200) * 2
= -720
Beta
= (2760 – 2500) * 5
= 1300
Gama
= (920 – 920) * 1
= 0
In Total material price variance
= [(1840 + 2760 + 920) – (2200 + 2500 + 920)] * 400
= -40000
Material mix variance
(Actual quantity * Standard Price) – (Standard quantity * Standard Price)
= [(2200 + 2500 + 920) * 400] - [(1840 + 2760 + 920) * 400]
= 40000
Total material yield variance
(Standard output * Standard cost) – (Actual output * Standard Cost)
= [(1840 + 2760 + 920) * 400] - [(2200 + 2500 + 920) * 400]
= -40000
b) the cost associated with material and the occurrence of variance in its cost is the issue of
purchasing manager and it is nit at all under the control of production manager. Also, the
manager handling production activity is not among the decision makers who set various

standards mix. And thus it is not appropriate to hold production managers for any of the
variances occurred for anything which is not under his control. There seems that there is no use
of planning variances. Price and quality of products here are considered to be volatile and using
its planned standard of material and yield variances doesnt gives us the proper view of the
production activity. The standard mix of these three products are constant for five years despite
changing both quality and market price of its ingredients. It results in controlling variances on
the part of production manager who is considering out of date standards for calculating current
variances. Here kappa co. is not giving required importance towards the variances occurred, this
leads to production manager over sighting any higher cost incurred which is not at all good for
the overall performance of kappa co.
Question: 3
Zero based budgeting and Incremental Budgeting
Zero based Budgeting is budgeting done from scratch. It is a method in which expenses have to
be justified for a new period. The process starts from a zero base and every function within an
organization is analyzed for its need and costs. It assumes previous year revenue to be zero and
computes the costs involved in each product category line by line to know the expenses involved.
Incremental Budgeting means incremental increases happening over previous budgets
with an increase in spending for instance. The budget analyzes only new expenditures and the
budget is prepared using actual performance as base.
Zero based budgeting while having its merits as demerits too. The demerits are it being
subjective in nature calculates every expense while it is not easy on organization's part to
calculate every expense. The approach may help in short term but for long term it is not suitable.
There is rigidity in the budget whereas an organization cannot always stick to the budget. These
demerits can be overcome if organization is using a combo of zero based budgeting as well as
incremental budgeting. Incremental budgeting is simple in its nature and allows some changes to
be done as per the changing situation. Zero based budgeting is tedious and time consuming as
every line of various product categories have to be assessed while Incremental Budget does not
get involved in complex calculations. Managerial training is necessary for doing zero based
budgeting and hence it takes time for them to grasp the concepts. The staff however not getting
trained in the same cannot put forward their suggestions.

However, merits of this budget type make it a requirement to go with incremental
budgeting as it promotes accuracy in forecasting estimates and can help sort out grievances of
departments that they did not receive the required funds. The rigidity in the budget can help
wade off managerial interference as it has strict guidelines to address. The line by line approach
although tedious but helps in assessing current demand of that product category for budget.
Talking of demerits of traditional budgeting, it promotes unnecessary spending by departments
for products which may not be providing adequate return. Using a combo, it will help company
in spending on the product category which is giving good returns. The traditional budget does
not consider changing market factors and thus it will not suffice for future changes which may
occur. The budget method does not take a comprehensive review of various product segments
which the other method considers. Innovative measures being not used in this method as it is
prepared from the previous year's budget removes scope for making changes while a
combination will induce both simplicity as well as creativity in assessing the demand of the
products. The combo will help in correction of measures which were not being taken separately
and will also help in achieving accurate budgeting for the company.

REFERENCES
Books and journals
Online
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