Management Accounting: Calculation of Variances and Evaluation of Manager's Performance

This document discusses the calculation of price and sales volume contribution variances in management accounting. It also evaluates the merits and demerits of using variances to evaluate manager's performance. The case of XLG Company is explored, focusing on their decision to import from Brazil or produce in-house in the UK.

Management
Accounting

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
PART A...........................................................................................................................................1
1. Calculation of price and sales volume contribution variance..................................................1
3. Critically evaluate the merits or demerits of using variances in order to evaluate manager’s
performance.................................................................................................................................3
PART B...........................................................................................................................................6
1. Assessing the report that FamaQ in house in UK keep importing from Brazil.......................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................9

INTRODUCTION
Management accounting is a methodology that very many organisations can use control
employee productivity and to formulate investment choices. The managers must be able, with the
assistance of it, to start deciding whether or not it should make organizational changes policy
changes (Chibili, 2019) (Das, 2019). There have been multiple internal participants including
staff, administrators, major shareholders, creditors etc. who are using reports and
recommendations to assess whether a company is working correctly or not. This document is
related to business XLG that is a drug processing agency and is situated in the northern side of
England. The company includes two separate cleaning products which have been two separate
substances that are X and Y. The market for companies in the industry is very strong (Ghorbel,
2016). The entity decided to move all of its online orders owing to lockdown due to corona virus.
Specific things will be explored for this reason. They involve estimating discrepancies such as
market volume, commodity price forecasting and organizational variation, and evaluating the
benefits and demerit points of using them in managerial performance review. In addition, this
report also shows a detailed security council the intention to turn famaQ at home in the UK or to
continue purchasing it from Brazil.
MAIN BODY
PART A
1. Calculation of price and sales volume contribution variance
Given information regarding sales, material prices, budgeted or actual values will help the
managers to calculate the variances in different aspect. This information helps in calculating
sales and material price variances of both Chemicals such as X & Y, these are as follow:
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
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Actual Sales Volume 850 units 750 units
Standard sales price £ 35 £ 30
Actual sales price £ 45 £ 37
Standard margin £ 25 £ 20
Sales price variance:
Sales Price Variance is the estimate of the gross profit shift as a consequence of the
discrepancy between the real and regular market value. Sales Price variance can be measured in
many ways as seen in the above formulae. In reality, the variability measurement is very
straightforward if it just recollects the purpose of getting the variability, i.e. how much
transformation in total sales is ascribable to the transition in market value from the specification.
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
Interpretation: According to calculation get results of Chemicals X and Y after put the
amounts in the equation and get the results 8500 in favourable of X and 5250 in favourable of Y.
Sales variances is the difference of actual or standard price and both chemical X&Y are in
favourable position which are beneficial for the XLG Company.
Sales volume contribution variance
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Sales volume Variation calculates the sales output as a result of variations in the standard
price, average benefit or standardized expenditure between actual goods sold over the time equal
to schedule (Mazarak and Fomina, 2016). This variation is very relevant because it allows
organizations to decide how quantity variability negatively impacts the corporation's results.
Chemicals X Details Amount
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
Interpretation: As per the above question it has been interpreted that to calculate the sales
variance requires putting all the items according to equation and gets results. From the
calculation sales volume contribution variance get outcomes for X, 8925 in favourable manner
and for Y, 4650 favourable. Chemical X is in more favourable situation in context of sales
volume contribution variance.
3. Critically evaluate the merits or demerits of using variances in order to evaluate manager’s
performance
Suitable use of variance analysis is an important mechanism for a firm is to achieve its
long-term goals. Whenever an organization is identify a variance in an element like material,
labour, etc. It requires considering the significant effect on reporting its periodic statements, as
well as in making reference to such a variance, this will affect managers practices toward certain
attaining organizational objectives (Erokhin And et.al., 2019). Variance analysis is a quantitative
measurement of variance between actual and expected behaviour. This analysis is used to create
corporate control. It might enable managers to make a lot of changes and key choices that might
make company more profitable in the future. It's vital to know that the analysis of variances
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doesn't answer business effect problems. Additionally, it offers professional accountants and
managers an indication about how they should appear for possible problems with information.
A variation represents both the disparity between uniform resource and the real capacity
constraints for the operational activities. There may be a variation related to variations in sales or
price disparities. If the actual expense is higher than the usual expense or the expected cost, an
unfavourable difference is the disparity. If the actual cost is higher than average cost or the
estimated cost, the difference is a favourable if the value is positive. Though positive gap is
favourable variance and the other side negative difference is unfavourable variance. Variance
interconnects with other variances because its differences are whether positive or negative, are
significant in strategic thinking. Variance has several positive as well as negative aspects which
affect the final outcome of the company. In order to increase the efficiency as well as
effectiveness of their calculation, managers need to evaluate their merits or demerits which helps
in expending their business. A detailed discussion on the main benefits and demerits of the use of
differences in the measurement of organizational results continues in this context:
Merits:
 Analysis of variance facilitates an effective budgeting operation because managers need
to see smaller variations from the expected budget (Ismail, Isa and Mia, 2018). Usually
having a smaller variance allows administrators to make comprehensive and forward
looking financial decisions.
 Identification of variances serves as a monitoring function. Review of major variance on
critical products allows the managers of XLG Company to know the reasons, and it helps
managers to look for potential means of preventing too much variability.
 Evaluation of variation encourages transfer of accountability and activates monitoring
structures on divisions where they are needed. For example, whether labour productivity
variation is viewed as adverse or raw material cost variance acquisition is unfavourable,
manager can hold power of such departments to improve performance.
 Verification of departure from normal or predicted seems to be the key aspect of
variances analysis. This departure will centre the analysis on the management. The
necessary information such a departure shall be given to the managers, in particular for
unfavourable variance where cost is more than expected estimation.
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 Another benefit of the variation would be its value in budget limits. In case of adverse
variance administrators take fair monitoring steps. Where sufficient reasons are not given
and reasonable preventive steps are taken, evidence of an unfavourable variation is
assessed in first place.
 Uncertainty or variation is the possible modification of the budgeted amounts. Unless, in
addition to an incorrect budget estimate, there is no rational justification for uncertainty,
the outlook for opportunity should be updated or redesigned.
 Another merit of variances is to assess the output of supervisors and, in general, the
manager controller (Pavlatos and Kostakis, 2018). Favourable number indicates great
manger efficiency, while negative variation means bad performance.
 Another advantage of that variance will be its expenditure limited value. In event of
adverse variation managers take the necessary steps to track equally. Where there are
insufficient reasons for doing so and sensible precautionary measures are taken,
information of an unfavourable variation is evaluated first.
 The potential adjustment of the quantities budgeted is ambiguity or volatility. If there is
no reasonable reason for confusion in relation to an inaccurate expenditure forecast, the
criteria for incentive will be revised or revamped.
Demerits:
 Analysis of variance is an activity which is based on the financial results, posted far later
after financial year closure (Quinn and Hiebl, 2018). There may be a time difference that
may impact the corrective measures taking capacity to some extent. Also, not all
alternatives of variance in financial information may be accessible that also makes it
extremely difficult to act on variances.
 When the budgeting is not completed, taking into account the thorough review of each
aspect, the budget planning procedure to be carried out arbitrarily, and is required to stray
away from the real figures. The analysis of variances might not have been a helpful
method after that.
 Many deviation considerations are not found in accounting records, and accounting
departments need to study and analyze information such as the distribution of labors,
inventory costs, and payroll data in order to identify the causes of such variances. This
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carry-on process is cost effective when the managers have been able to fix the problems
effectively on the bases of the provided knowledge.
 A variance analysis seems to have a major drawback in that it takes much longer to
evaluate the effects of the variance and can therefore postpone the corrective steps
(Rikhardsson and Yigitbasioglu, 2018). The monitoring process leads to a significant
reduction in time frame which hence will significantly hinder the implementation of
preventive techniques.
 Analysis of variance has a significant downside except that it takes a very long time to
evaluate the relationship of variance, and consequently appropriate actions are postponed.
The tracking mechanism results in a considerable long time and would also greatly
prolong the implementation of control steps.
 Another indicator of output is vulnerability that can be due to variability in data. Analysis
of response decides the real result because it varies from of the activities expected.
PART B
1. Assessing the report that FamaQ in house in UK keep importing from Brazil
XLG is a pharmacy company that operates in UK and very certain European regions. The
competition were it performs operations has very competitiveness and another of core chemicals
which brings it strategic advantage is importing from famaQ, Brazil. The lockdown was took
place in March 2020 and was imposed by the government of the United Kingdom. Due to that,
business is chosen to move their revenue creating process through digitally so it can address all
of lockout issues that are occurring.
Being among the main chemicals of firm uses to manufacture the final product, it is
delivered from Brazil in order to be able to react systemically to market problems (Samuel,
2018). It'd be very essential to ensure that a company solves all the possible dangers that this
could have. Since shutdown, importing of chemical famaQ from Brazil by XLG will be unlikely.
If this was to be shipped, though, this will lead to multiple risks. There seems to be a greater risk
of COVID-19 transmission, a higher computational time, added expenses etc. After that, if the
product is not imported, the net income and the relative benefit provided by famaQ will be that.
As a result, demand for chemicals X and Y is also expected to increase by 45 percent, and
it will certainly increase as per industry surveys. A few of among which the company should
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really be focusing on production are the UK-wide famaQ, because it can encounter consumer
demand. The shipping time will be reduced by 15 days from either the earlier time once it is
produced in the UK, which indicates the business will begin production early.
The cost of manufacturing per famaQ unit in the UK might be 3 pounds which would have
been low compared to the manufacturing cost of 3.7 pounds per commodity (Uyar, 2019). This
means that the corporation will be manufacturing famaQ in the UK rather than importing it from
Brazil. It would add about significant benefits to the market. Many of its principal benefits
include:
 If famaQ were produced it would encourage the industry as the level of manufacture is
quite small relative to the amount of the consumer.
 The delivery time will be reduced by 15 days, it means that production can start more
quickly and meet consumer demand sooner.
 Only if the famaQ chemicals are manufactured rather than imported from Brazil, the
probability of corona virus transmission will be small.
 Manufacturing items at Lockdown will be very difficult and developing famaQ in the UK
would have been the best choice for future operations to also be followed by the
organization.
Having considered all of the other variables, production costs and benefits of manufacturing
famaQ in the UK, it was determined that XLG would manufacture the chemicals in the UK
rather than importing chemicals from Brazil since it would be helpful for business excellence
(Wales And et.al., 2020). It is highly recommended that XLG Company should manufacture the
chemical instead of importing from Brazil. It will increase the transporting cost, maximise
overall cost of the chemical which minimise the profit margin of XLG Company. In addition,
importing material from Brazil also very risky because it will leads the transmission of Corona
Virus from one place to another; it will further generate more issues for the UK country.
CONCLUSION
From the overall discussion it has been analysed that management accounting plays essential
role which helps in maximising overall operational performances. Managers are able to
build strategic decisions with the aid of technology in order to improve organizational efficiency
or increase market growth. This is a tool used by both internal and external parties to assess the
organization's corporate position in terms of economic growth, or overall operational
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efficiencies. It would be very important for all businesses to be careful in trying to develop
realistic strategic decisions that they used correct tactics. Calculation of variance based on
the actual or anticipated value of sales volume and is necessary for any decisions to be made.
With the aid of it, the total performance of both organization and management can be measured.
It should be very useful to be mindful of its positives and demerit points when utilizing it, so that
good plans can be developed for future and used to improve market production and success.
Manager should choose the most appropriate options to help the company increase the profit
margin by minimizing the cost of production, as well as ensuring that the distribution of COVID-
19 is small, or it will be unsafe for all, and extend the lockout time that will result in economic
suffering.
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REFERENCES
Books & Journals
Chibili, M., 2019. Basic management accounting for the hospitality industry. Routledge.
Das, S. C., 2019. Management control systems: Principles and practices. PHI Learning Pvt. Ltd..
Erokhin, V. And et.al., 2019. Management accounting change as a sustainable economic
development strategy during pre-recession and recession periods: evidence from
Russia. Sustainability. 11(11). p.3139.
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.
Pavlatos, O. and Kostakis, H., 2018. Management accounting innovations in a time of economic
crisis. The Journal of Economic Asymmetries. 18. p.e00106.
Quinn, M. and Hiebl, M. R., 2018. Management accounting routines: a framework on their
foundations. Qualitative Research in Accounting & Management.
Rikhardsson, P. and Yigitbasioglu, O., 2018. Business intelligence & analytics in management
accounting research: Status and future focus. International Journal of Accounting
Information Systems. 29. pp.37-58.
Samuel, S., 2018. A conceptual framework for teaching management accounting. Journal of
Accounting Education. 44. pp.25-34.
Uyar, M., 2019. The management accounting and the business strategy development at
SMEs. Problems and perspectives in management, (17, Iss. 1), pp.1-10.
Wales, W. And et.al., 2020. Orienting toward sales growth? Decomposing the variance attributed
to three fundamental organizational strategic orientations. Journal of Business
Research. 109. pp.498-510.
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