Variance Analysis for Assessing Manager Performance in Management Accounting

This document discusses variance analysis and its role in assessing the performance of managers in management accounting. It explains the advantages and disadvantages of variance analysis and its impact on budgeting and decision-making. It also explores the make or buy decision for FamaQ and factors to consider in evaluating the best option.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
INTRODUTION..............................................................................................................................1
PART A...........................................................................................................................................1
i) Sales price variance and sales volume contribution variance..................................................1
ii) Material price planning variance and the material price operational variance.......................2
iii) Variance analysis for assessing the performance of managers..............................................3
PART B...........................................................................................................................................6
To evaluate make or buy decision for FamaQ.............................................................................6
CONCUSION..................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUTION
Management accounting could be defined as process of identifying, analysing,
measuring, interpreting and communicating the information to the managers. MA focuses over
accounting aimed in informing the management about the operational metric. It includes
information related to the cost or product or services purchased by company. Budget often used
for quantifying decisions made in the operational planning. Performance reports are used by the
management for identifying the variances between budgeted and actual budgets. The major
difference between management and financial accounting is that FA is collection of the
accounting data for creating financial statement and MA is internal process used for accounting
the business transactions. Present report is based on the concepts of MA and XLG Company. It is
producer of cleaning products which is prepared using the material called FamaQ and it has
secured patent for the material. Company wants to study the variances and the merits and
demerits of using variances in analysing the performance of managers. It wants to analyse the
make or buy decision for the FamaQ as the imported materials is costing high to company.
PART A
i) Sales price variance and sales volume contribution variance
Sales and Contribution
X Y
Total Sales 595 595
Actual sales volume 850 750
Standard Sales Price 35 30
Actual Sales price 45 37
Standard Margin 25 20
Sales Price Variance – This variance analysis is used for measuring changes in sales
revenues as the result of variations between the actual & standard sales price. Actual sales of the
products could differ from the budgeted sales because of various reasons such as increase in
demand of product. There are various factors that influence the sales like change in tastes or
preferences, prices, trend and such other factors (Chiu and et.al., 2018). The variance quantifies
the difference in sales that results from the difference in market and standard price.
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Sales Price Variance
(Actual price * Actual units sold) - (Standard price * Actual
units sold)
(45*850)-
(35*595)
(37*750)-
(30*595)
17425 9900
(Actual Price - Standard price) * Actual unit (45-35)*850 (37-30)*750
8500 5250
Sales volume contribution variance – The variance is used for measuring the revenues
earned by firm over the actual sales as against standard sale volume projected. This helps
company in making accurate estimation for the revenues which will flow to company in future.
Using this variance management identify the difference in contributions for taking steps for
increasing the profits.
Sales volume contribution variance
Actual sales units -Budgeted sales units * Standard unit
profit
(850 -595)* 25 (750 -595 )*20
6375 3100
ii) Material price planning variance and the material price operational variance
Material Price
X Y
Actual sales volume 850 750
Standard Price 2.5 2.5
FamaQ unit required 1 1
Increased Price 3.7 3.7
Prevailing Price 4.5 4.5
Material price planning variance – The variance analysis is used by the management to
measure the extent to which the original budgets are required to adjust to reflect changes in the
operational conditions of the current circumstance and the one which is envisage while
calculations of the standards.
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Material Price planning variance X Y
(standard price - Revised price) *
Standard usage
(2.5 - 3.7) * 850 (2.5 -3.7) * 750
-1020 -900
Material price operational variance – The variance is used to identify the extent up to
which attainable targets are to be achieved. Operational variance is used to calculate the after
planning variance is established and variance is considered to be realistic manner to assess the
differences. The variance are used by companies to assess the performance of its managers.
(Material price operational variance)
X Y
Actual cost 3145 2775
Actual cost -(actual usage * prevailing
price)
3145-(850*4.5) 2775-(750*4.5)
-680 -600
iii) Variance analysis for assessing the performance of managers.
Variance analysis could be described as process used for analysing the deviations in the
budgeted and actual figures of the budget. Variance analysis is an important tool used by the firm
for measuring the performance of management and different operations and activities performed
by them. Company is required to prepare budget every making predictions for the incomes and
expenditures based on the previous budgets. Budget for current year is prepared by making
adjustments related to inflations, economic conditions, market forces and like factors that could
influence the budgets. After the end of process management measure the difference between
actual and budgeted figures. The difference between the two is known as variances. After
analysing variance, management identify the reasons due to which variances have been caused in
different process and operation carried out by the firm. This helps the company to take effective
measures and steps for controlling and reducing the variations (Kes and Kuźmiński, 2019).
Management also frame strategies to ensure that the variances are reduced to minimum.
Variance analysis helps the managers in effectively framing the budgets and ensuring that
the variance occurring before is not happening next time. Variance in MA is both adverse or
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favourable. Both positive and negative variances also reflect negatively over the budgeting
effectiveness unless it is caused due to extreme events. Variance both adverse and favourable
reflects the inefficiency of management in framing accurate budgets or to manage the operations
with the available resources. It could be seen that the management using variance analysis
enhance the budgeting activities which it wishes to have less deviations from the budgeted
figures. Low deviations lead managers to make forward looking and detailed decisions. This
works as control mechanism for the management. Conducting variance analysis of the major
deviations of the essential items enables company to identify the issues and to help management
to look for possible methods about variations or differences that management can avoid.
Using variance managers ensures that effective utilisation of the resources is made in the
operations of processes to derive the maximum benefits out of them. Also it helps the
management in allocating the roles and responsibilities to staff at which they are good and
specialise. It also engages control mechanism in the departments to ensure optimum utilisation of
the resources is done. Managers are required to have strong control and governance over the
processes and operations for increasing the efficiency and productivity of the company.
Advantages and disadvantages of variance analysis to measure the performance of
managers
Variance analysis could be said as an simple and easy method or tool used by the
organisations. It is act of comparing actual with the standards for identifying variations.
Performance is judged on the basis of extent of variations between the actual and budgeted
figures. Standards are set by the top management by effectively analysing the present and past
experiences and trends. It is part of budgetary control where managers are required to apply their
professional skills and knowledge to prevent any harm and use budgeting process.
Performance of the managers is also measured using variance analysis and how effective
they are in managing the operations. There are managers that see favourable or the adverse
variance only as bad or good. Variance analysis is more deeper than just adverse or favourable.
Budgets are to be framed by properly evaluating the previous budgets and factors that could
influence current budgets and ensure that costly mistakes are not made and also assumptions are
taken on more accurate terms that does not leads the company to face losses.
In variance analysis responsibility accounting is the phrase that is applied for analysing
how managers can be held accountable for actions which are taken (Annamalai, 2018).
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Organisations are generally structured in segments and it is responsibility of the managers to
ensure that effective and efficient allocation of the resources is made in between different
departments or activities. Budgets and variance are carried out by the managers on departmental
basis that makes easy for management to be accountable for material variations from the planned
operations. Responsibility accounting ensures that worked is performed by the managers with
due care and diligence.
Significant and material variations attract the attentions of managers and executives over
the areas that are showing major differences between planned and actual activities. It requires
great care to be taken by management while using variance analysis as the management tools for
enhancing the performance of business.
Variance analysis with the number of advantages has also disadvantages. The method is
used for identifying the variations between actual and budgeted outcomes but does not provides
the ways how they could be reduced. Managers by only identifying the variance could not
achieve effectiveness as they do not provide about the main causes of difference. Investigation
and research is to be made for analysing the causes of variances based on which optimum
decisions could be taken. Without identifying the main reasons of variations performance of
managers could not be identified. Foremost reaction of managers can be for praising buyers that
are responsible to purchase the materials from the cheap sources than anticipated & reprimand
managers or departments using such materials. There may be chances that the variance are
caused due to controllable factors but are shown as uncontrollable by managers for reflecting
accurate performance.
Setting standards for price of materials based on previous prices where the prices in
actual have raised. Managers for achieving the budgeted targets could use material of inferior
quality that may lead to decline in demand of products which turns variance analysis to be
disadvantage for the company (Septria and Heryanto, 2019). Also the actual performance of
managers could not be measured as there are uncontrollable factors such as inflations, market
forces, etc, that makes it difficult to achieve the budgeted. It also takes considerable time to
identify and examine the effects of variances over for which measures are to be taken by the
management.
Performance of the managers could be measures by how effectively they have managed
the situations of change. Managers have the responsibility of achieving the desired goals and
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targets by effectively utilising the resources and ensuring that quality material is used for the
production of goods and services.
PART B
To evaluate make or buy decision for FamaQ
It is one of the most important aspect to decide whether to make in-house or to purchase
from the outside buyers. It is an important analysis for the company as it involves significant
amount of money and time of company decided to make the product in-house. A company has to
effectively evaluate the make or buy decision before any steps are taken. It involves evaluating
which will be more beneficial for the company to make or to buy from third part. Outcomes of
the decision should maximise long term financial outcomes for company. There are number of
factors that are required to be considered by XLG before making the decisions are :
Cost – Company is required to analyse the alternative that causes lowest out of pocket
expenses. it is also required to add the fixed cost when adding the internal costs that is
considered incorrect (Serrano, Ramírez and Gascó, 2018). Firms are only required to include the
direct costs in compilation of internal costs for manufacturing the FamaQ in house. Cost quoted
by the supplier is 3.7 where the in house production will cost only 3 for the unit. Though cost of
making is lower but other factors are also required to be analysed.
Capacity – XLG has to analyse the capacity of company to produce or manufacture the
product in-house. Supplier capacity is also analysed for meeting the demands of company is
sufficient and also in timely manner. Company is proposed to have increased demand by 45%
due to which it may not be able to meet the demand from in house production. The suppliers are
large manufacturers that could meet the demand of company to significant extent.
Expertise – Company is also required to analyse the expert knowledge and experience in
manufacturing the products. Manufacturing products apart from their main stream could make
the company to suffer issues or problems. Manufacturing product will also divert the focus of
company from its main products to the new material as it is not having experience in the
producing the materials (Borg and et.al., 2019). Over this it is more beneficial for the company to
buy it from the third party as losses if suffered in products are significantly high in comparison
with the increased cost.
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Funds – Only deciding to manufacture product in-house is not enough even if it has the
capacity and the expertise of funds required for manufacturing are not enough. Manufacturing in
house requires investments of plant, machinery and equipments. It will also be required to
purchase raw material, incur labour and overhead costs. It has to analyse whether the material
produced could be sold alone in the market. It has to identify whether it is able to arrange for the
required funds to start the in house manufacturing of materials. XLG will be required to raise
funds from the market to establish the manufacturing unit for the materials which will take
considerable time. Also it involves risks and returns where buying it from the third party will not
require company to consider the risks.
Bottlenecks – It has to analyse whether producing in-house will be easing the burden of
bottleneck operations of company. If bottleneck operations are reduced in buying from third
party company should go for purchasing from outside rather than making in house.
Shipping Options – Supplier may provide the company with facility to store goods on its
own and ship the material to company on demand. Carrying cost of the products are to be
considered by the company as it may have to incur high storage cost for keeping the products
manufactured. The material purchased from outside will also require company to incur carrying
cost as the materials are purchased from abroad and it takes considerable time which is 14 days
to reach company premises (Hillebrand and Pishchulov, 2016). Carrying cost is lower in in-
house production and higher in purchasing from outside as imported and company is required to
store the product for future needs by maintain safety stocks.
Strategic importance – Importance of the product to corporate strategy of the company play
major role in decision making. It is beneficial if it is important, to manufacture the material for
maintain complete control over the product. Option is adopted if company possess proprietary
production facility which it will not be required to share with suppliers.
From the above analysis it could be evaluated that cost of manufacturing in house will cost 3
where purchase from outside cost 3.7. Also company is not having knowledge and the required
funds to manufacture the products. It will be more beneficial for the company to import the
FamaQ as increase in prices is due to pandemic which may by decreased after the virus and
company will focus over its main stream of cleaning product X & Y.
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CONCUSION
It could be summarised from the above report that management accounting plays an
important role in the success of the organisation. Variance analysis helps company in improving
the existing operations of the business by framing cost effective strategies. It also makes
effective allocation of the resources among different departments for optimum utilisation and
achieving the targeted goals and objectives.
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REFERENCES
Books and Journals
Chiu, C.H. and et.al., 2018. Optimal advertising budget allocation in luxury fashion markets with
social influences: a mean‐variance analysis. Production and Operations
Management.27(8).pp.1611-1629.
Kes, Z. and Kuźmiński, Ł., 2019. Application of extreme value analysis in the assessment of
budget variance risk. Econometrics.23(2). pp.80-98.
Septria, D. and Heryanto, H., 2019. Performance Capability Analysis and Regional Budget
Evaluation in Implementing Regional Autonomy in Dharmasraya District. Archives of
Business Research.7(7). pp.180-187.
Annamalai, H., 2018. Moist static energy and its variance budget diagnostics for ENSO-related
Precipitation anomalies along the Equatorial Pacific in Climate Models. AGUFM, 2018,
pp.A12F-06.
Serrano, R.M., Ramírez, M.R.G. and Gascó, J.L.G., 2018. Should we make or buy? An update
and review. European Research on Management and Business Economics.24(3). pp.137-
148.
Borg, M. and et.al., 2019. Selecting component sourcing options: a survey of software
engineering’s broader make-or-buy decisions. Information and Software Technology. 112.
pp.18-34.
Hillebrand, B. and Pishchulov, G., 2016. Integrated make-or-buy and facility layout problem
with multiple products. In Logistics Management (pp. 121-132). Springer, Cham.
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