Variance Analysis in Management Accounting

This article discusses variance analysis in management accounting and its role in evaluating managers' performance. It covers the calculation of price and sales volume contribution variance, material price planning variance, and material price operational variance. It also explores the decision faced by XLG company to make famaQ in-house or import it from Brazil. The article provides insights into XLG's performance during the lockdown and the challenges it encountered.

LCBB5002

INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
1. Calculation of price and sales volume contribution variance..................................................1
2. The calculation of material price planning variance and material price operational variance 3
3. Changes in operational, critical analysis of merits and demerits of using variances in
assessing managers performance.................................................................................................4
PART B...........................................................................................................................................7
Report assessing the decision to make famaQ in house in the UK to keep importing it from
Brazil............................................................................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Management accounting is an approach which is used by most of the entities for the
purpose of tracking business performance and formulating future decisions. With the help of it,
the managers will be able to decide that whether they have to make changes in organisational
policies or not. There are various internal stakeholders such as employees, manager, board
members, shareholders etc. who use management reports so that they can determine that the
entity is performing properly or not (Adler, 2018). This report is based upon XLG company
which is a cleaning product entity and it is located in eastern part of Britain. There are two
different cleaning agents that are produced by the organisation These are two different chemical
which are X and Y. The competition in the industry for the enterprise is very high. Due to
lockdown because of corona virus the entity planned to move all its sales online. For this
purpose, different aspects will be analysed. These are calculation of variances such as sales price
and volume, material price planning and operational variance and analysis of merits and demerits
of using them in assessing the managers performance. Apart from this, a brief report that
assesses the decision to make famaQ in house in the UK or keep importing it from Brazil is also
prepared in this report.
PART A
1. Calculation of price and sales volume contribution variance
Given Information:
Total units sold: 1600
Material price variance: £ 27000 Favourable
Sales and Contribution:
Chemical X Chemical Y
Budgeted total sales 595 units 595 units
Actual Sales Volume 850 units 750 units
Standard sales price £ 35 £ 30
Actual sales price £ 45 £ 37
1

Standard margin £ 25 £ 20
Sales price variance:
Sales price variance is equivalent to the change between real sales at market price and
estimated sales at target price (Bromwich and Scapens, 2016). Average sales are the sum of the
units currently sold as well as the average price per unit. Similarly, actual sales at the budgeted
level match the total of the units sold and the price per unit budgeted.
Chemicals X Details Amount
Sales Price Variance ( X ) ( Actual Price – Standard Price ) * Actual Unit
= ( 45 – 35 ) * 850 8500
Favourable
Chemicals Y
Sales Price Variance ( Y ) ( Actual Price – Standard Price ) * Actual Unit
= ( 37 – 30 ) * 750 5250
Favourable
What is the total variance?
Sales volume contribution variance:
Sales Volume Variance is the calculation of benefit or expense adjustment as a result of
the discrepancy between real and budgeted volumes of revenue (Eldenburg, Krishnan and
Krishnan, 2017).
Formula:
Sales volume contribution variance = (Actual number of units sold × Budgeted price per unit)
– (budgeted number of units sold × Budgeted price per unit)
Chemicals X Details Amount
2

Sales volume contribution variance ( X )
= ( 850 * 35 ) – ( 595
* 35 ) 8925
Favourable
Chemicals Y Details Amount
Sales volume contribution variance (Y)
= ( 750 * 30 ) – (595
* 30 ) 4650
Favourable
2. The calculation of material price planning variance and material price operational variance
Given Information:
Original standard price £ 2.50 per-unit
Increased(revised) unit price £4.50
Material price operational variance:
Chemicals X Details Amount
(A) Original budgeted sales x Standard Margin = 595 * 2.5 * 25 £ 37,187.5
(B) Revised budgeted sales x Standard Margin = 595 * 4.5 * 25 £ 66,937.5
Material price operational variance (A – B) -£ 29,750
Chemicals Y
(A) Original budgeted sales x Standard Margin = 595 * 2.5 * 20 £ 29,750
(B) Revised budgeted sales x Standard Margin = 595 * 4.5 * 20 £ 53,550
Material price operational variance (A – B) -£ 23,800
Material price planning variance:
3

Chemicals X Details Amount
(A) Revised budgeted sales * Standard Margin = 595 * 4.5 * 25 £ 66,937.5
(B) Actual Sales Quantity * Standard Margin = 850 * 25 £ 21,250
Material price planning variance (A – B) £ 45,687.5
Chemicals X
(A) Revised budgeted sales * Standard Margin
= = 595 * 4.5 * 20 £ 53,550
(B) Actual Sales Quantity * Standard Margin = 750 * 20 £ 15,000
Material price planning variance (A – B) = £ 38,550
Have you practiced the variance seminar question in week 5 on Moodle, you should attempt it
before doing the calculation.
3. Changes in operational, critical analysis of merits and demerits of using variances in assessing
managers performance
Variance analysis could be defined as the process of determining the difference between
the standard and actual production of the entity so that it could be analysed whether the
enterprise is able to meet its projections or not. If the businesses are not able to predict properly
then it may result in higher actual cost as compared to the budgeted figures. Due to this, losses
could be faced by a business. In order to make sure that accurate projections are made the
managers of all the entities are required to analyse actual position of business and then formulate
decisions for future. While using variances for the purpose of formulating decisions for
upcoming period it is very important for all the entities to make sure that they are aware of all the
merits and demerits of it. As various variances such as sales price and volume contribution,
material price planning and operational variances will be used in XLG to determine managers
performance so it will be essential for the company to analyse all the merits and demerits of
using them (Hiebl and Mayrleitner, 2019). Some of the key points that can help to understand all
the benefits and drawbacks of using variances are discussed below:
4

Merits of using variances: When variances will be used by entities for evaluating
managers performance and other purposes then it may result in various merits. All of them are as
follows:
 Controlling expenses: Variance analysis plays a vital role in controlling the expenses
because when the results of variances will be adverse then the managers can take
appropriate decisions for controlling the negative situation. In order to work properly the
managers, try to find the explanation for the adverse results then they take controlling
related actions so that they can improve the performance of business. In case of XLG
company the actual sale is very high because of the higher demand which has resulted in
the adverse variance. In order to deal with this situation, the managers could have
purchased more material than the standard one as it would have resulted in favourable
variance (Ismail et.al., 2018).
 Evaluating performance: Variance analysis is used for the purpose of evaluating
performance of business by analysing that the actual results are compatible with the
budgeted figures or not. It also helps to analyse the performance of controlling managers
because when the variances results are favourable, it reflect good performance. When the
results are adverse then it will reflect that the managers have not made efforts in making
decisions or estimations correctly. How can you relate this to XLG’s variance
calculations?
 Analysis of accountability: With the help of variance analysis or the calculations a
system of accountability within the organisation could be established. If a manager takes
action in the future, then it will be the main responsibility to be accountable for the same
so that their performance could be analysed. It will also be very important for them to
take responsibility if the results are adverse. If the level of accountability will be low in
XLG then it will demonstrate the weak performance of the managers.
 Adjusting budgeted estimations: Variance analysis facilitate the adjustment of budget
estimations. When the reason for the adverse variance will be wrong estimation in
standard figures then the estimations will be corrected and adjusted. If the managers will
be highly involved in this procedure, then it will help to evaluate their performance easily
and enhance performance of business. It is one of the main merits of using variances for
5

the purpose of evaluating performance of the managers in XLG (Maas, Schaltegger and
Crutzen, 2016). Can you relate this to the increased demand of chemical X and Y?
 Setting system for roles and responsibilities within the enterprise: Variance analysis
is used to set a system so that all the roles and responsibilities could be assigned to staff
members properly. With the help of it, the senior managers can determine ability of all
the manages and then set the system which will help to meet the future goals and
objectives in long run. With the help of it, controls and efficiency within the entity could
be improved and enhanced. Can you relate this to XLG?
Demerits of using variances: There are various types of disadvantages of variances for
XLG company. All of them could be analysed with the help of following discussion:
 Time consuming process: Variance analysis is a time-consuming process which takes
too much time to analyse the organisational as well as managerial performance. Due to
this, the senior authority of the organisations are not able to analyse the performance of
managers on time and formulate specific policies for betterment of business. Apart form
this, the calculation of variances diverts the focus from improved performance of
business to assessment of actual business activities which may result in issues in future.
From assessing actual performance, you would know if there is improved performance or
not, you need to be a bit clear on this. Also can you apply it to XLG?
 Delayed corrective actions: When the top-level authorities of the organisation will not
be able to determine that whether the managers or company are performing well or not in
time then it will also affect the action taking procedures. It will result in delayed
corrective actions because the top-level executives will not be able to take right decisions
on right time. Due to this, the possibility of decreased performance of business could be
increased which will leave negative implications upon the attainment of all the long-term
goals and objectives (Matsuoka, 2020). Can you relate this to XLG?
 Non standardisation production: If an entity is operating under service sector then it
will be very difficult for it to apply variance analysis. As XLG is planning to go online so
it will also be a part of service industry and there will be increased overhead costs so it
may also create difficulties for the business. While taking the sales online it will be very
important for the managers of the enterprise to make sure that they are able to analyse
6

variances properly as it will show their ability to perform their jobs properly. Going
online doesn’t automatically make XLG a service business, remember it actually has
tangible goods (chemical X and Y) which service businesses don’t have.
 Behavioural issues: variance analysis may result in short-termism because of the
inherent tendency of it against the quantified and short-term objectives as well as results.
Apart from this, if there will be negative perception about it then it will encourage the sub
optimal behaviour among the employees. One of the examples of it is attempting to
incorporate budget slacks. It is one of the main demerits of using variance analysis for the
purpose of determining that managers are performing well or not (Tekathen, 2019). Can
you relate this to XLG?
PART B
Report assessing the decision to make famaQ in house in the UK to keep importing it from
Brazil
XLG is a chemical company which is operating its business in United Kingdom and some
other locations in Europe. The market in which it is carrying out operations is very competitive
and one of the main chemicals that provides it competitive advantage is famaQ which is
imported from Brazil. In the second quarter of March month of 2020 the nationwide lockdown
took place and it was enforced by the legal authorities of United Kingdom. Due to this, pandemic
the entity planned to move its sales online so that it can deal with all the challenges that are
taking place because of lockdown. As one of the main chemicals which is used by the
organisation to make the final product is imported from Brazil so it may result in problems for
carrying out business in systematic manner. It will be very important for the company to make
sure that it deals with all the negative implications which could be resulted due to this. For XLG
it will be more expensive to import famaQ from Brazil because of Lockdown. Apart from this, if
it will be imported then it may result in various risks. These are increased possibility of
spreading the corona virus, higher delivery time, increased cost etc. Apart from this, if it will not
be imported then it may result is decreased competitive advantage because the main chemical
that helps XLG maintain competitive advantage is famaQ (Van der Stede, 2016). Additionally, it
has been estimated that the demand for chemical X and Y will be increased by 45% and it will
likely continue according to market research. One of the main solutions which could be focused
7

by the organisation is making the famaQ in UK so that it can meet the market demand. If it will
be manufactured within United Kingdom then the delivery time will be reduced by 15 working
days which means the entity can start its production early. Apart from this, the per unit cost of
manufacturing famaQ in UK will be 3 pounds which is low as compared to the imported cost
which is 3.7 pounds per unit. It shows that the organisation should make famaQ in UK rather
than importing it from Brazil as it will result in various benefits for business. Some of the key
benefits of it are as follows:
 When famaQ will be imported then it will facilitate the business as the cost of
manufacturing is very low as compared to the imported cost.
 The delivery time will be reduced by 15 days which can help to start the production
earlier and meet the market demand.
 The possibility of spreading corona virus will be nil if the famaQ chemical will be
manufactured rather than importing it from Brazil.
 In Lockdown it will be very difficult to import goods so making famaQ in United
Kingdom is right choice for carrying out all the operations in systematic manner in
future.
By analysing all the above aspects, risks from importing and benefits of making famaQ in
UK it has been analysed that XLG should manufacture the chemical in UK rather than importing
it from Brazil as it will be beneficial for growth and development of business (Van der Stede,
2017).
You need to also consider the various costs of manufacturing in the UK, such as setting
up a manufacturing plant etc,
You need to consider both advantages and disadvantages of setting up manufacturing in
the UK or importing it and then make an informed decision.
You made no mention of relevant costing, you need to briefly describe it.
Use headings to separate your point, don’t just keep everything together.
CONCLUSION
The above project report concludes that management accounting is an approach which is
used by internal stakeholders for the purpose of assessing actual position of business. While
planning to make strategic decisions for future it will be very important for all the organisations
to make sure that they are using effective techniques. One of them is variance analysis. With the
8

help of it, actual performance of business as well as the managers could be determined. While
using it, it will be very important to be aware of all its merits and demerits so that effective
decisions by using it could be formulated for future.
9

REFERENCES
Books and Journals:
Adler, R. W., 2018. Strategic performance management: Accounting for organizational control.
Taylor & Francis.
Bromwich, M. and Scapens, R. W., 2016. Management accounting research: 25 years
on. Management Accounting Research. 31. pp.1-9.
Eldenburg, L. G., Krishnan, H. A. and Krishnan, R., 2017. Management accounting and control
in the hospital industry: A review. Journal of Governmental & Nonprofit Accounting.
6(1). pp.52-91.
Hiebl, M. R. and Mayrleitner, B., 2019. Professionalization of management accounting in family
firms: the impact of family members. Review of Managerial Science. 13(5). pp.1037-
1068.
Ismail, K., Isa, C. R. and Mia, L., 2018. Market competition, lean manufacturing practices and
the role of management accounting systems (MAS) information. Jurnal Pengurusan
(UKM Journal of Management). 52.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production. 136.
pp.237-248.
Matsuoka, K., 2020. Exploring the interface between management accounting and marketing: a
literature review of customer accounting. Journal of Management Control. pp.1-52.
Tekathen, M., 2019. Unpacking the Fluidity of Management Accounting Concepts: An
Ethnographic Social Site Analysis of Enterprise Risk Management. European
Accounting Review. 28(5). pp.977-1010.
Van der Stede, W. A., 2016. Management accounting in context: Industry, regulation and
informatics. Management Accounting Research. 31. pp.100-102.
Van der Stede, W. A., 2017. “Global” management accounting research: some
reflections. Journal of International Accounting Research. 16(2). pp.1-8.
10