MANAGEMENT ACCOUNTING - REPORT

MANAGEMENT ACCOUNTING - REPORT

INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
1. Sales price variance and sales volume contribution variance..................................................1
2. Material price planning variance and material price operational variance..............................2
3. Critically analysing key merits and demerits in relation to use of variances in assessing
manager’s performance:..............................................................................................................4
PART B...........................................................................................................................................7
1. FamaQ gives XLG competitive advantage..............................................................................7
2. Demand for chemical X and Y has increased by 45% which is likely to continue according
to market research........................................................................................................................7
3. The cost of making a unit of Fama Q in the UK is £3 with delivery times reducing by 15
working days................................................................................................................................8
CONCLUSION................................................................................................................................8
REFERENCES..............................................................................................................................10

INTRODUCTION
In continuous changing business settings every corporation is facing issue related to making
decisions and manage business in effective manner. Management Accounting is first choice of
managing personnel to deal with such issue as this is wider aspect which offers multiple
techniques and tools to support managerial decision-making framework. The study covers the
major aspects of managerial accounting that necessary to evaluate for business's sustainable
success (Otley, 2016). The entire study consists of 2 parts: A and B. The first part covers
practical sum related to computation of multiple variances based on the case study of XLG
Company. It also covers detailed evaluation about merits and limitations of applying variances in
the assessing managing personnel performance. While the another part covers risk may arise by
making import Farma Q as well as how this may impact XLG Company during lock-down based
on the provided case study.
PART A
1. Sales price variance and sales volume contribution variance
Given Information:
Total units sold: 1600
Material price variance: £ 27000 F
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
Standard margin £ 25 £ 20
1

Sales price variance:
Chemicals X
Sales Price Variance ( X ) = ( Actual Price – Standard Price ) * Actual Unit
= ( 45 – 35 ) * 850
= 8500 F
Chemicals Y
Sales Price Variance ( Y ) = ( Actual Price – Standard Price ) * Actual Unit
= ( 37 – 30 ) * 750
= 5250 F
Sales volume contribution variance:
Sales volume contribution variance =
(Actual number of units sold × Budgeted price
per unit) – (budgeted number of units sold ×
Budgeted price per unit)
Chemicals X
Sales volume contribution variance ( X ) =
( 850 * 35 ) – ( 595 *
35 )
8925 F
Chemicals Y
Sales volume contribution variance (Y) =
( 750 * 30 ) – (595 *
30 )
4650 F
2. Material price planning variance and material price operational variance
2

Given Information:
original standard price £2.50 per-unit
Increased(revised) unit price £4.50
Material price operational variance:
Chemicals X
(A) Original budgeted sales x Standard Margin = 595 * 2.5 * 25 = 37187.5
(B) Revised budgeted sales x Standard Margin = 595 * 4.5 * 25 = 66937.5
Material price operational variance (A – B) = -29750
Chemicals Y
(A) Original budgeted sales x Standard Margin = 595 * 2.5 * 20 = 29750
(B) Revised budgeted sales x Standard Margin = 595 * 4.5 * 20 = 53550
Material price operational variance (A – B) = -23800
Material price planning variance:
Chemicals X
(A) Revised budgeted sales x Standard Margin
= 595 * 4.5 * 25 = 66937.5
(B) Actual Sales Quantity x Standard Margin 850 * 25 21250
Material price planning variance (A – B) = 45687.5
Chemicals X
(A) Revised budgeted sales x Standard Margin 595 * 4.5 * 20 = 53550
3

=
(B) Actual Sales Quantity x Standard Margin 750 * 20 15000
Material price planning variance (A – B) = 38550
3. Critically analysing key merits and demerits in relation to use of variances in assessing
manager’s performance:
The appropriate use of the variance analysis is essential manner for a company to achieve
its longer-term objectives. When an entity acknowledges a variance within the an aspect like
material, labour etc., it requires to consider the considerable impact of such aspect not just in
reporting its quarterly statements but also on responding to such a variance will affect the actions
of management towards achieving its objectives. Analysis of variances is a quantifiable
evaluation of the variation among real and anticipated actions. This review is being used to
establish control of a corporation (Farkas, Kersting and Stephens, 2016). This could allow
managers to make crucial changes and strategic decisions which could make the corporation
more competitive in the forward. It is important to remember that the study of variances does not
address questions about market results. Alternatively, it provides accounting professionals and
administrators with an idea of where they should search for potential content problems.
A variance reflects difference between standardized resource as well as actual resource
required for the operations. A variation can occur attributed to the variations in sales or the
differences in costs. Whether the real cost is greater than normal cost or planned cost, the
discrepancy is an adverse variance. Whether the real cost is greater than normal cost or the
forecasted cost, the variance is a favourable difference. While positive figure of difference
is favourable variance, whereas negative difference is unfavourable variance (Callus, 2019).
Variance is interconnected to other variations. Positively or negatively differences between
variances are substantial in strategic planning. In this regard following is a comprehensive
discussion on major merits and demerits of use of variances in assessing managerial
performance:
Merits:
 The very first merit of the analysis of variances is the confirmation of departure
from standard or anticipated. Such departure will draw managers focus to the review.
4

Management shall be provided with the pertinent facts for such a departure, in particular
for unfavourable variance (cost is above expected).
 The second merit of variance will be its importance in the controlling of expenditures.
Managers take reasonable control measures in the event of unfavourable variation. In first
position, justification of an adverse variance is evaluated, where appropriate explanations
are not provided, and adequate control measures are taken.
 The third merit in variance or variance analyses is the potential modification in budget
forecasts. if there's no reasonable explanation for variability besides an inaccurate budget
forecast, the budgeted prediction for the potential will be modified or revised.
 Fourth merit of variance is to ascertain the efficiency of the managers and, in
particular, controlling manager. positive variance exhibit better performance status of
the manger, while unfavourable variance implies weak performance.
 Fifth merit of analysis of variances is the establishment of a framework of duties and
responsibilities within the organisation. The definition of duties and responsibilities
enhances productivity and control mechanisms within the entity (Kumar, 2019).
 Computation of variances or review of variances shall create a framework of
transparency within the company. Everybody is answerable for the outcomes of
unfavourable variances (material or labour costs are above expected).
 In certain situations, budget vs. real variances can suggest need to reassess the
corporation 's product range or targeted consumer base. There is a lot of conjecture about
readying a budget. When those expectations lead budget to blow-up, that may be
since the underlying estimates are completely incorrect for a number of factors. This may
be as easy as a shift in economy or as complex as problems in bringing goods out to
consumers. The required improvements within the company could be demonstrated
at end of each day (Style, 2020).
 It assists the business to achieve its strategic goals and ensure efficacious use
of corporation’s resources. It also aims to build values for its stakeholders.
When variance analysis provides a series of findings that generate broad variances
in report, it may suggest that there have been major problems in way the budgets
are being planned. Issues may contribute to use of incorrect data or information, or there
may be calculation errors in spreadsheet that used plan either a budget or a actual
5

variance review. In fact, variance assessment is a helpful way to test the corporation's
budgeting system. Through taking effort to enhance the budgeting system, the entity
wants to become much more effective.
 Variance analysis is vital monitoring method as it brings emphasis to aspects where real
activity varies from expected operations. Another benefit is that can be beneficial in
finding aspects where resources are not being used effectively and aspects where changes
are needed. Therefore, the study of variance encourages flexibility in management.
Variance analysis may also be utilized to find places where costs overruns and to assess if
the defined standardized cost is appropriate.
Demerits:
 Accounting personnel collects variances at ending of each month prior presenting the
outcomes to managers. For most situations, management needs input much quicker, so it
prefers to focus on alarm signs or on-site measures.
 Plenty of the factors for variances/variations are not present in accounting reports, so
accounts department have to review and analyse details like labours routing, materials
expenses, and payroll reports to determine the causes for these variances. This add-on
operation is cost-effective unless the managers has been able to successfully address the
issues on the basis of information received.
 When budgeting is not carried out on the basis of a thorough review of each variable, the
budgeting procedure may be handled loosely, which would differ from actual figures. In
such case, the analysis of variances may not make any sense (Marzlin Marzuki and
Ismail, 2019).
 A variance-analysis has a significant downside in that this takes a longer time to analyse
the impact of the variation and thus the remedial actions may be delayed. The tracking
mechanism leads in a substantial delay in time-frame and thus the introduction of
prevention strategies would be drastically delayed.
6

PART B
1. FamaQ gives XLG competitive advantage
It is true that Fama Q provide comparative advantage to the XLG Company because it is
superior cleaning agent of the business and XLG take patent in order to safe their market leading
position in the UK from its competitors (Azudin and Mansor, 2018). Sales price variance for the
Chemical X is £ 8500 which is in favourable position and for Chemical Y it is £ 5250 which is
also in favour. Sales volume contribution variance of Chemical X and Y is £ 8925 and £ 4650
respectively and both are in favourable condition for the XLG Company. On the other side,
material price operational variance for the Chemical X is adverse that is -£ 29750 and for
Chemical Y is -£ 23800 that is also adverse which means it is not beneficial as well as profitable
for the organizations. In addition, material price planning variance is for Chemical X and Y is £
45687.5 and £ 38550 respectively (Carini, Giacomini and Teodori, 2019). XLG Company should
stop importing from Brazil and also focus on in house production to save their transportation
cost. XLG Company should focus on online sales due to corona virus spread all over the world.
Fama Q provide competitive advantage to the XLG Company but in the lockdown period
price of per unit increases to £ 4.50 and further XLG has to pay £ 3.70 to Fama Q which become
costly for them. Company need to stop importing from Brazil due to high air transport charges
which further increase the selling price of cleaning products. From the values of sales and
material variances, it has been observed that importing material from Brazil by air transform
increase the overall price of each unit.
2. Demand for chemical X and Y has increased by 45% which is likely to continue according to
market research
Demand for Chemical X and Y increases by 45% then company should continue its
production as per the market research where they need to stop importing products from Brazil.
Due to lockdown process in the country and all over the world affect the organization as well as
every member of the country which has to suffer (Qian, Hörisch and Schaltegger, 2018).
Original standards price of ingredient is £ 2.50 per unit but due to this pandemic situation it will
increases unit price £ 4.50 per unit and in result XLG Company has to pay £ 3.70 rate for per unit
to Fama Q. It will minimise the profit margin of the company which is not beneficial because of
air transport of material which generate high cost.
7

In order to increase their profit margin in this situation, they need to stop importing goods
from Brazil and find its replace or produce itself in the UK to control their cost. Because due to
high transport cost, original produce price increases this can minimise the demand or also
minimise the profit margin for XLG Company.
3. The cost of making a unit of Fama Q in the UK is £3 with delivery times reducing by 15
working days
Making products in the UK minimise the overall cost as well as also reduces the delivery
time which is quite effective and helps in targeting more people. Because people prefer those
brand or company which deliver goods & services at minimum prices. If company get lower cost
through making units of Fama Q in the UK, then they have to continue this process and stop
importing from Brazil until the situation become normal.
Currently XLG Company paid £ 3.70 to Fama Q and if they start making in UK then they
having £ 3 cost per unit which take 15 days less time to deliver products. Fastest delivery option
is comes under the customer satisfaction and their buying experience which improves the brand
image or helps in maximising their demand in the market (Rikhardsson and Yigitbasioglu, 2018).
XLG Company has to shift their focus and start making products in the UK because it minimise
the cost through reducing transport charges and taxes. Importing products from outside UK also
take many working days which can cause to cancel the order from customer’s sides.
After analysing all the aspects and factors which leads to generate more cost and
automatically increase the selling price, managers will identify and make strategic decisions
which they has to follow in respect of company to maintain its profitability as well as demand of
products & services in the market in this pandemic situation.
Lookdown satiations generate huge crises for the world where surviving of the organizations
are quite difficult, people struggle for keeping their job safe and entities for generating revenues.
It is the greatest opportunity for the organization to maintain their profitability in this critical
situation.
CONCLUSION
From the overall discussion it has been observed that changing business environment create
several issues as well as challenges which affect the company’s production and profitability.
Using management accounting concepts, managers are able to make effective strategic decisions
8

as per the current circumstances which entity faces. Through identifying sales and material
variances, managers identify the profitability situations of the business operations and also
measure that which action is in favour of production or not. In the lockdown situations, every
organization get affect but it is better to understand the situations and identify the possible
solutions to recover from such difficult time.
9

REFERENCES
Books & Journals
Azudin, A. and Mansor, N., 2018. Management accounting practices of SMEs: The impact of
organizational DNA, business potential and operational technology. Asia Pacific
Management Review. 23(3). pp.222-226.
Callus, K., 2019. The relevance of standard costing and variance analysis in Maltese
bakeries (Master's thesis, University of Malta).
Carini, C., Giacomini, D. and Teodori, C., 2019. Accounting reform in Italy and perceptions on
the local government consolidated report. International Journal of Public
Administration. 42(3). pp.195-204.
Farkas, M., Kersting, L. and Stephens, W., 2016. Modern Watch Company: An instructional
resource for presenting and learning actual, normal, and standard costing systems, and
variable and fixed overhead variance analysis. Journal of Accounting Education, 35,
pp.56-68.
Kumar, A., 2019. Standard Costing and Labour Cost Variance. The Management Accountant
Journal, 54(10), pp.65-73.
Marzlin Marzuki, N.A.R. and Ismail, J., 2019. Benefits and limitations of variance analysis in
management accounting. ACCOUNTING BULLETIN, p.15.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, pp.45-62.
Qian, W., Hörisch, J. and Schaltegger, S., 2018. Environmental management accounting and its
effects on carbon management and disclosure quality. Journal of Cleaner
Production. 174. pp.1608-1619.
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.
Style, A.P.A., 2020. Budgeting, Variance Analysis, and Performance Evaluations SLP 4. Order.
10