Waitrose's Variance Analysis and Recommendations for Improvement

The report highlights Waitrose's significant variances between actual and expected results, indicating a loss due to high variances in sales revenue (-£2180) and actual profit (-£1350). To minimize these variances, effective strategies by responsibility centers such as HR department motivating personnel for better output, finance manager implementing cost reduction strategy, and marketing department focusing on attracting buyers through social media and mobile applications can be implemented. The report concludes that costing is an important aspect of business, providing certainty and assisting management to quote appropriate margins.

Management Accounting: Costing and
Budgeting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................4
TASK 1............................................................................................................................................4
1.1 Classifying different types of cost.........................................................................................4
1.2 Using different costing methods............................................................................................5
1.3 Calculating costs using appropriate techniques.....................................................................6
1.4 Analysing costs data using appropriate techniques...............................................................8
2.1 Preparing and analysing routine cost reports.........................................................................8
2.2 Using performance indicators to identify potential improvement.........................................9
2.3 Suggesting improvements to reduce cost, enhance value and quality.................................10
TASK 2..........................................................................................................................................11
3.1 Purpose and nature of budgeting process.............................................................................11
3.2 Selecting appropriate budgeting methods for organization and its needs............................11
3.3 Preparing budgets according to the chosen budgeting method............................................12
3.4 Preparing cash budget..........................................................................................................13
4.1 Calculating variances, its causes and corrective actions......................................................14
4.2 Preparing a reconcile operating statement..........................................................................15
4.3 Reporting of findings to the management with identified responsibility centres...............16
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17
2

INDEX OF TABLES
Table 1: Job cost..............................................................................................................................5
Table 2: Unit cost.............................................................................................................................5
Table 3: Absorption cost..................................................................................................................6
Table 4: OAR...................................................................................................................................7
Table 5: Costing basis of labour hour..............................................................................................8
Table 6: Cost data............................................................................................................................8
Table 7: Variances...........................................................................................................................9
Table 8: Production budget............................................................................................................12
Table 9: Material usage budget......................................................................................................13
Table 10: Cash budget...................................................................................................................13
Table 11: Variances analysis.........................................................................................................14
Table 12: Reconcile operating statement.......................................................................................15
3

INTRODUCTION
Management accounting is the most imperative aspect of business as it facilities control
in the organization with the help of budgeting and costing techniques. Several aspects are
associated with management accounting such as budgetary control, interim reporting and
taxation as well as office services. Present report is based on Waitrose that deals in food services
in the supermarket along with online shopping. It is the sixth largest grocery retailer in the UK
which caters the need of large number of buyers. Furthermore, report covers different types of
cost and its methods for calculating appropriate selling price for the products and services.
Similarly, use of performance indicators for potential improvements in corporation has also been
explained. Apart from this, purpose and nature of budgeting process have also been described.
TASK 1
1.1 Classifying different types of cost
There are different types of cost which are based on the nature, behaviour and elements
of business. It affects sales price of products and services (Costing methods, 2015). These are as
follows-
On the basis of nature
According to the nature of business, cost is classified into different aspects like material,
labour and overhead. Here, raw material of food products depends upon the volume of
production (Bellah and et. al., 2013). On the other hand, labour cost is based on the productivity
of corporation. In addition to this, overhead consists of the costs such as fuel, water etc. used for
producing products.
On the basis of behaviour
In accordance with the behaviour, cost is segregated into different parts such as fixed,
variable and semi-variable. Fixed remains constant throughout the production cycle and does not
fluctuate as per the volume of output (Bonazzi and Iotti, 2014). However, variable cost tends to
change as per the output's volume. In addition to this, semi-variable cost is partly fixed and
partly variable. For this, the most effective example can be quoted of Telephone expenses. Here,
Waitrose needs to pay fixed amount of bill for phone expenses whether that is in use or not.
On the basis of element
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Cost classification on the basis of element can be referred as direct or indirect. Here,
direct cost is incurred on expenses like labour and material whereas indirect cost is related to
administration department (Gesimba, Alvar and Mante, 2014). Further, direct cost is associated
with production activities whereas indirect is not.
1.2 Using different costing methods
There are different costing methods used by the corporation such as job, unit, contract
and batch costing. Along with this, process and operating costing are also calculated by the
company. Here, job costing is applied in industries like repair, decoration and printing where
products are produced in accordance with the requirement. Apart from this, contract cost is
associated with the construction and shipbuilding industry which require high time and resources
(Kavanagh, 2011). Here, cost of each contract is calculated separately and control is also done in
the same manner. Unit cost is other aspect wherein cost of single output is calculated on the basis
of total expenses. It assists the management of Waitrose to quote price of each product and
accordingly, set the margin of profit on single unit so as to enhance overall rate of return. Apart
from this, process cost is applied in food product, paints, textile sector etc. wherein output of one
process is referred as raw material for other process (Łukaszewski and Wilk, 2016). Here, cost of
each process is taken into account for the purpose of deriving process cost of the production.
Furthermore job and unit can have been calculated as follows-
Table 1: Job cost
Particulars Per unit Total costs for 1000 units
Direct material 5 5000
Direct labor 2 2000
Direct overheads 1 1000
Fixed overheads 3750
Total costs 11750
Fixed overhead is 5000 for direct labour hours 2000
It has been assumed that labour hour per unit for job no. 550= 1.5
Calculation of fixed overhead (1000 units)=£5000/2000 hours*(1.5 hours*1000units) = £3750
Table 2: Unit cost
Particulars Per unit (1000 units)
5

Direct material 5
Direct labor 2
Direct overheads 1
Fixed overheads 3.75
Total costs
Unit cost of products has been calculated in above mentioned table. It reflects that per
unit cost of product will be 11.75. This is calculated through dividing total production cost with
the number of units. For example- £11750/1000 units = £11.75. Hence, total cost per unit
required is 11.75.
1.3 Calculating costs using appropriate techniques
The appropriate technique of cost calculation are explained as follows-
 Absorption costing-This is another effective aspect of cost calculation which provides
detail related to fixed and variance cost that are associated with products and services. It
serves as the classification of cost among different sector (Parmenter, 2015).
Table 3: Absorption cost
Basis of
allocati
on Ratio Production department
Service
departments Total
Machinery 1
Machinery
2 Stores
Mainten
ance
Indirect
material 200000 225000 425000
Indirect wages 150000 160000 310000
Light and
heating
depart
ment
wise
occupie
d area (2:1:1:1) 37500 18750 18750 18750 75000
Insurance of machin (1:1:0.5:0.5) 5000 5000 2500 2500 15000
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Machinery
ery's
book
value
Salary of staff
Total
workers
(30:20:15:1
0) 30000 20000 15000 10000 75000
Total costs 422500 428750 36250 31250 900000
Re-appropriation of cost from service to production sector
Costs as per
above table 422500 428750 36250 31250
Stores
Direct
material
(200000:
225000) 17059 19191 -36250
Maintenance
Direct
machine
hours basis
(150000:
200000) 13393 17857 -31250
Total costs 4.53 452952 465798 Nil Nil
Overhead absorption rate (OAR); In case of considering machine hour rate application of
absorption rates will be done as follows-
OAR=TOTAL COST/ MACHINE HOUR
Machine 1 Machine 2
£452952/150000 = £3.02 £465798/200000 = £2.33
Table 4: OAR
Particular Costing Per unit cost
Direct material £8
7

Direct labour £7
Overheads
Machinery 1 £3.02*1.5 4.53
Machinery 2 £2.33*2 4.66
Total costs 2.33 24.19
1.4 Analysing costs data using appropriate techniques
Waitrose will make use of labour hour for absorption of overhead and accordingly cost
will be calculated as follows-
Machine 1 Machine 2
£452952/300000 = 1.51 £465798/200000 = 2.33
Table 5: Costing basis of labour hour
Particular Costing Per unit
cost
Direct material £8
Direct labour £7
Overheads
Machinery 1 £1.51*3 4.53
Machinery 2 £2.33*1 2.33
Total costs 21.86
In case calculation of cost is done on the basis of material allocation then cost will be
£24.19 but it will be 21.86 for selecting the basis as labour hour. It is showing that use of labour
hour as basis for cost calculation is more effective as it reduces cost to a great extent and provide
appropriate outcome for Waitrose. However, direct material per unit is incurred as 8 pound
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where as direct labour was 7. It serves as the direct or indirect cost which can be varied in
accordance with volume of production. It affect cost of production per unit and accordingly firm
increase pricing scenario also. Furthermore, overhead consists of expenses incurred from
machinery 1 and machinery 2 where it has been found that first machinery has cost of per unit
4.53. In addition to this, second one incurred 2.33. Accordingly total cost is 21.83 and here
management of corporation can margin of profitability in accordance with selected pricing
strategy.
2.1 Preparing and analysing routine cost reports
Routine cost report consists of detail information related to cost of production lot and
benefits derived from the same. It can be done as follows-
Table 6: Cost data
Particular Units/ cost per unit
Production 2500 units
Material price £15 per unit
Labour rate £10 per unit
Overhead rate £8 per unit
Fixed cost £10000
Table 7: Variances
Particular Expected Actual (2500 units) Variance
Direct material 35000 37500 -2500
Direct labour 26000 25000 1000
Direct overhead 19500 20000 -500
Fixed overheads 10000 10000 0
Total costs 90500 92500 -2000
The above mentioned table reflects that there is negative variance with regard to direct
material. It is showing that corporation is not working in accordance with set budge (Shelby,
2013)t. In fact there is significant difference in the actual and expected output. The above table is
showing that expected amount of direct material will be 35000 but it is 37500. It can be seen that
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variance of 2500 exist in the direct material. O the other hand, it was expected that 26000 will
be incurred on direct labour but actual expenses on labour was 25000. Owing to this, there is
positive variance that corporation is using its resources effectively. Apart from this, direct
overhead was assumed to be 19500 but in real it was 20000. It reflects that negative variance of
500 has been derived. Therefore, Waitrose should focus upon budgeting policies in order to
anticipate future performance.
2.2 Using performance indicators to identify potential improvement
Performance indicators play an important role in the organization because of their
assistance in potential improvement. There are several performance indicators associated with
Waitrose which are explained as follows- Profitability-It is the most important element which defines that how organization is
performing in particular financial year (Chapman, Hopwood and Shields, 2011). In case,
if profit ratio of Waitorse was high in 2015 but low in 2016 then it depicts that
corporation is not performing in a right manner. It requires to reduce the cost of
production and perform other necessary improvements in its production cycle. Sales turnover-This is another imperative aspect which reflects that whether company is
gaining profit or not (Elmassri and Harris, 2011). For instance: if sales turnover is
increasing then it will reflect positive situation for corporation. It aids to cater the need of
management in an effectual manner because market share will also be increased with the
same. Quality of products and services- Good quality of products and services generally
increases customer base (Debarshi, 2011). It assists the corporation to meet the
expectations of buyers and deliver good quality of services among them. Furthermore, it
is very important for the organization to carry out its business in an ethical manner.
 Cost reduction-Overall reduction in the cost is also an important performance indicator
which sheds light on the low price of product and services (Macintosh and Quattrone,
2010). On the other hand, if cost of production increases then it reflects that management
of Waitrose is not implementing effective practices in the production process.
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2.3 Suggesting improvements to reduce cost, enhance value and quality
Waitrose can use different alternatives for reducing cost associated with the production
process. It is helpful for management to enhance profitability and offer product to the customers
in relatively low prices- Material management- Effective management of material is helpful to reduce the cost
because most of the times, storage cost is increased to a great extent. Owing to this,
effective methods like LIFO and FIFO can be used so as to ensure optimum utilization of
limited resources (Bhaird, 2010). Cost control- Under this, workforce must be trained to use different aspects for reducing
the overall cost (Thomas, 2010). It proves to be effective in meeting objectives of the
company in order to quote right price of products and services. Monitoring and controlling- Monitoring and controlling are very important for
management as thereby, wastage of material will be reduced and recycling of same can
be ensured.
Enhance value and quality
For enhancing value and quality, Waitrose should provide training to its personnel in an
effectual manner. However, suggestions can be taken from workforce also so as to maintain
quality standards. Such standards must be in accordance with the demand of buyers which leads
to meet their expectations effectively (McKevitt and Davis, 2013). Similarly, innovation and
creativity must be ensured at workplace with involvement of highly skilled personnel. However,
competitor’s analysis can be done for offering better quality which in turn create good image of
corporation in the marketplace.
TASK 2
3.1 Purpose and nature of budgeting process
Budget is the process of anticipating expenses of company for future time span and
taking corrective action for well being of corporation. The basic aim of preparing budget is to
reduce uncertainty associated with business. It assists organization to go in upward direction so
as to increase overall rate of return (Bellah and et. al., 2013). With the help of budgeting
technique corporation can easily control overall expenses incurred on production activities which
leads to ensure higher rate of return and low cost of production. Furthermore, budgeting process
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facilitates to allocate financial resources in right business activities in order to get competitive
edge. Apart from this, budgeting process tend to allocate budget for current business activities as
well as future strategies of organization which tend to create its unique identity in the
marketplace (Bonazzi and Iotti, 2014).
Furthermore, process of budgeting start with setting objectives. Here, management of
Waitrose set objectives by collecting data of internal and external environment of business.
Furthermore, expectations of managers are discussed in formal meeting so they can easily
accomplish set objectives of organization (Gesimba, Alvar and Mante, 2014). After
reconciliation of objectives in accordance with expectations, budget is created by financial
personnel of organization. After completion of budget, outcome are monitored along with
variance analysis. This assists organization to reduce overall gap between actual ads expected
outcome. In addition to this, adjustment is done in the light of expectation or set gaols.
3.2 Selecting appropriate budgeting methods for organization and its needs
In order to have sustainable development, it is significant for management of Waitrose to
ensure about selection of budgeting methods. It is also necessary for decision makers to design
and select budget methods as per the organizational needs. In addition to this, the Zero base
budgeting method can also be one of most suitable aspect for the organization (Kavanagh,
2011). In this, management needs to provide justification for all expenses in the budget process
so that goals can be accomplished in desired form. It is a budget that starts from baseline and
every function of organisation is analyzed according to organizational need. Cost of operational
activities also need to be evaluated for further developments. In order to expand business
effectively at international level the business firm requires low cost and high budget for
investment (Łukaszewski and Wilk, 2016).
In this regard, the management of Waitrose also requires optimum allocation and
utilization of sources so that needs of business units can be accomplished in most suitable
manner (Shelby, 2013). With an assistance of Zero base budgeting the top level authorities can
design strategic goals which can be applied for success of budgeting process. Specific functional
areas also need to be designed in desired form for better satisfaction.
As per consideration of traditional method of budgeting the management also requires
identification of previous year sales and expenditures (Elmassri and Harris, 2011). It can be
12

accessed from the recorded data and effort to balances all aspects effectively. One of key benefit
of such kind of budgeting method is equal support to all departments in order to accomplish
goals and objectives. Moreover, Zero base budgeting also provides support in identifying
opportunities that can increase productivity (Chapman, Hopwood and Shields, 2011). Effective
allocation of resources promotes sustainable development and efficient management of cash
flow. It also impacts positively on communication system and assist in decision making process.
3.3 Preparing budgets according to the chosen budgeting method
Preparation of budget is done as follows which assists Waitrose to conduct its operation
activities in an effectual manner.
 Production budget-It is the most budget which consists of detail information related to
estimate sales turnover (Debarshi, 2011). It consists of detail with regard to opening
inventory. Furthermore, production of proposed quarter has been analysed so as to give
upward direction to corporation.
Table 8: Production budget
Particular 1st Quarter 2nd Quarter 3rd Quarter
Estimated sales 500000 650000 825000
Less: Opening stock 75000 97500 123750
425000 552500 701250
Add: Closing stock (15% of the
following month) 97500 123750 135000
Production 522500 676250 836250
The below mentioned budget is showing that first quarter will have production of 522500
where 75000 inventory has already been kept by management. On the other hand, it has been
assumed that 15% stock will be kept additional from last month. Apart from this, 2nd quarter will
generate production flow of 676250 where closing stock will be of 123750. Apart from this, last
quarter will be having 836250 production which leads to cater provide rough estimation to
company regarding requirement of resources.
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 Material purchase budget-Material purchase budget support production budget of
organization as they are inter-related to each other (Macintosh and Quattrone, 2010).
Here, company require to purchase 1015500 in 1st quarter whereas in second quarter it
will purchase 1416500.
Table 9: Material usage budget
Particular 1st Quarter 2nd Quarter 3rd Quarter
Material Require (2 per kg) 1045000 1352500 1672500
Less- Opening stock 300000 270500 334500
745000 1082000 1338000
Add- Closing stock (20% of the
following month) 270500 334500 360000
Purchase 1015500 1416500 1698000
Note:
Material required in next quarter=900000*2 = 1800000
Closing stock of last quarter=1800000*20% = 360000
3.4 Preparing cash budget
The cash budget is very important for corporation which provides detail information
related to estimated income and expenses (Thomas, 2010). It is helpful to conduct training
program and allocate financial resources in most useful business activities-
Table 10: Cash budget
Particular 1st Quarter 2nd Quarter 3rd Quarter
Income
Cash sales 500000 650000 825000
Total cash revenues 500000 650000 825000
Expenditures
Material Purchase 250000 300000 345000
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Direct wages 75000 77000 80000
Variable overhead 15000 18000 25000
Fixed Overhead 55000 55000 55000
Total cash expenditures 395000 450000 505000
Net cash balance 105000 200000 320000
Opening cash balance 5000 110000 310000
Closing cash balance 110000 310000 630000
The above mentioned cash budget is showing that in first quarter revenue generated for
Waitrose was 110000 but it has been increased in next quarter and become 310000. It reflects
that expenses are managed and focus is laid on reducing cost of production. It has direct impact
on profitability. However, net cash balance in first quarter was 105000 which was increased in
second quarter till 200000. In addition to this, third quarter is showing net balance of 320000.
This proves to be effective for long run success of company. Here, derived positive outcome
reflects that Waitrose can invest its financial resources in profitable projects. Furthermore,
control must have on liquidity in order to meet short as well as long term obligation of the same.
It proves to be effective in expanding business at global marketplace.
4.1 Calculating variances, its causes and corrective actions
The variance calculation has been done in following table. It reflects that negative sales
volume variance but positive material variance. Similarly, negative fixed overhead variance has
been derived (McKevitt and Davis, 2013.). It affect budgeting policies as well as operation of
corporation. This is because difference in actual and expected especially negative one affect
business performance to a great extent
Table 11: Variances analysis
Sales volume variance
(4,160 – 3,040) = (1,120) (A)
Sales price variance (14,000- 13, 820) = (180)
(A)
Material variance
AQ (1425kg) X AR (£2.40) = £3420
The material price variance 0 (A)
AQ (1425kg) X SR (£2.40) = £3420
The material usage variance 60(A)
SQ (3500units x 0.4) X SR (£2.40) =
15

£3360
The Labour Variance
AH (345hrs) * AR (£7.8) =
£2690
The labour rate variance
70 (F)
AH (345hrs) * SR (£8.0) =
£2760
The labour efficiency variance
40 (F)
SH (3500units x 0.1)350hrs * SR (£2.40) =
£2800
Fixed Overhead
Actual fixed overheads =
£ 4900
The fixed overhead expenditure variance
100(A)
Budgeted fixed production overheads =
£4800
The main reason behind sales variance is poor marketing of products and services. It can
also be said that ineffective selling and distribution practices (Łukaszewski and Wilk, 2016).
Here, less skilled workforce, poor management and poor forecasting are the major issue behind
variances.
Owing to this, it is very important for management of Waitrose to control its expenses
and ensure proper management of raw material. In addition to this, effective marketing practices
must be adopted for increasing sales turnover.
4.2 Preparing a reconcile operating statement
The reconcile operation statement has been prepared as follows which portray all
information related to budgeted and actual figure. This also present variance of each element-
Table 12: Reconcile operating statement
Variance
Particulars Budgeted
(£)
Actual
(£)
Variance
(£)
Sales revenue (A) 16000 13820 -2180
Material Cost (a) 3840 3420 -420
Labor hours (b) 3200 2690 -510
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Fixed overheads (c) 4800 4900 100
Total Cost (a + b + c) 11840 11010 -830
Actual profit (A-Total cost) 4160 2810 -1350
The calculated figure are showing that Waitrose incur loss because of high variances in
actual and expected budget. It can be seen that sales revenue of corporation has variance of 2180
and in the same way actual profit has difference of 1350.
4.3 Reporting of findings to the management with identified responsibility centres
The aforementioned results are showing that Waitrose has significant variance in its
actual and expected results which can be minimized by using effective strategies by
responsibility center. For example hr department must motivate personnel for better output for
company (Shelby, 2013). For this purpose, continuous learning must be provided to employees
which will have direct impact on growth prospective of retail organization. On the other hand,
finance manager must try to implement cost reduction strategy which will prove to be effective
in successful operation of business. Similarly, marketing department should focus on appropriate
strategies for putting right kind of advertisement (Kavanagh, 2011). This will directly attract
more buyers. However, effective mode of communication like social media, mobile application
can be used for generating positive attitude among buyers. It enables company to increase sales
turnover and in the same manner profitability will also be increased.
CONCLUSION
The aforementioned report concludes that costing is the important aspect which gives
certainty to business. It is because cost calculation assists management to quote appropriate
margin on products and services so as to enhance overall rate of return. It is helpful for business
to determine tier long run growth and expansion at global marketplace with increasing
profitability. It can also be said that budgeting is helpful for allocation of financial resources and
proper communication regarding future business operation. This proves to be effective in
removing barriers occurred in success of company and give higher level of satisfaction to end
users.
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Life Cycle Approach. Springer.
Bonazzi, G. and Iotti, M., 2014. Agricultural cooperative firms: Budgetary adjustments and
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Chapman, C. S., Hopwood, A. G. and Shields, M. D., 2011. Handbook of Management
Accounting Research. Elsevier.
Debarshi, B., 2011. Management Accounting. Pearson Education India.
Elmassri, M. and Harris, E., 2011. Rethinking budgetary slack as budget risk management.
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Gesimba, P.O., Alvar, M.R. and Mante, R., 2014. Organisation Development Interventions on
Procurement Practice and Budgetary Control at Nakuru Municipal Council in Kenya,
Africa. International Journal of Business and Social Science. 5(4).
Kavanagh, S.C., 2011. Zero-Base Budgeting: Modern Experiences and Current Perspectives.
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Knowledge-Based Systems. 92. pp. 35-42.
Macintosh, N. B. and Quattrone, P., 2010. Management Accounting and Control Systems: An
Organizational and Sociological Approach. John Wiley & Sons.
McKevitt, D. and Davis, P., 2013. Microenterprises: how they interact with public procurement
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Parmenter, D., 2015. Key performance indicators: developing, implementing, and using winning
KPIs. John Wiley & Sons.
Shelby, R., 2013. Zero-Base Budgeting for the 21st Century Public Administrator. Atlanta:
Fiscal Research Center/Andrew Young School of Policy Studies/Georgia State
University.
Thomas, G. H., 2010. Managing financial resources. Open university press.
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