Financial Statement Analysis and Performance

This assignment delves into the analysis of financial statements within the context of logistics service providers. It examines various analytical techniques used to assess their performance and emphasizes the significance of key performance indicators (KPIs). Students will explore how financial statement data, coupled with relevant KPIs, can provide insights into a company's operational efficiency, profitability, and overall financial health.

Management Accounting
Table of Contents

INTRODUCTION...........................................................................................................................4
TASK 1............................................................................................................................................4
1.1 Different types of cost classification.....................................................................................4
1.2 Calculating Unit cost and total job cost.................................................................................5
1.3 Calculating cost of Exquisite using absorption costing technique........................................5
1.4 Analyzing cost of Exquisite...................................................................................................7
TASK 2............................................................................................................................................8
2.1 Preparing and analyzing cost report.......................................................................................8
2.2 Using performance indicators to identify areas for potential improvement..........................9
2.3 Ways to reduce cost and enhance value, quality.................................................................10
Task 3.............................................................................................................................................11
3.1 Purpose and nature of budgeting process............................................................................11
3.2 Selecting appropriate budgeting methods for organization.................................................11
3.3 Preparation of different types of budget..............................................................................12
3.4 Preparing of cash budget......................................................................................................13
TASK 4..........................................................................................................................................15
4.1 Calculating of variance........................................................................................................15
4.2 Preparing of reconciliation operating statement..................................................................16
4.3 Findings to management in accordance with identified responsibility centers...................16
CONCLUSION..............................................................................................................................17
REFERENCES..............................................................................................................................18
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INTRODUCTION
Management accounting is a crucial aspect by which management can keep detail record
related to accounting information and accordingly, they can take decisions related to pricing
strategies. It is also extended in three areas such as strategic, performance and risk management
which provide support to business in order to determine secure position in the marketplace. The
present report is based on the case study of Jeffery and Son's which produces many popular and
branded products (Weygandt and et. al., 2009). This has basically two departments such as
service (stores and Maintenance) and production. In this regard, classification of cost has been
done on the basis of element, function, nature and behavior. Further, unit cost and total cost have
been calculated by using job costing method. In addition to this, purpose and nature of budgeting
process are also explained.
TASK 1
1.1 Different types of cost classification
There are different types of cost involved in the production of products and services.
Here, costs have been classified into following categories-
Element-According to the element, cost is divided into two different parts such as direct and
indirect cost. Main examples of direct cost are heating, lighting and material as well as labor
which play active role in production activities (Jones and Clatworthy, 2006). On the other hand,
indirect costs are those which are indirectly related to the production. It includes smooth tools
which support production activities indirectly.
Function-Cost of production is divided according to the functions to be performed. It consists of
finance, production and marketing as well as research and development. Here, cost of
corporation will be recorded functionally for example in production department overall cost is
segregated on the basis of manufacturing and large amount is being utilized for carrying out
production. Further, in marketing department cost is indulged for development of advertisement
and other promotional tools.
Nature-Under this, cost is divided into three main parts such as labor, overhead expense and
material. All these aspects are related to the overhead expenses. It assists corporation to carry out
production in a smooth manner. For instance if organization provides payment to labor then it is
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considered as cost for the business and cost of purchasing material for production shows the
nature of cost. Here, cost of all the elements are differ from each other which in turn contribute
towards carry out business activities effectively (Cohen and Kaimenaki, 2011).
Behaviour- As per the behavior, cost is segregated into three parts such as fixed, variables and
semi variable. The semi variable cost is like telephone bill whereas fixed cost remains constant
throughout the flow of production. In addition to this, variable cost consists of material and labor
which change in accordance with the volume of production.
1.2 Calculating Unit cost and total job cost
The unit cost and total job cost have been calculated as per the given information. Here,
job cost is calculated as per each job involved in product (Needles, Powers and Crosson, 2008).
It consists of both direct and indirect cost so as to calculate sales price of product.
Table 1: Unit cost and total job cost
Particulars Amount (£)
Direct cost
Direct material 200
Direct labour 270
Indirect cost
Variable production overhead 180
Fixed production overhead 120
Cost per unit 770
Units to be produced 200
Total cost 770*200 154000
Working note:1
Fixed production overhead=(£80000 / 20000 hours) * 30 hours =£120
As per the aforementioned calculation it has been found that per unit cost of job 444 is
£3.85. Accordingly total cost of the job is £770.
1.3 Calculating cost of Exquisite using absorption costing technique
Production Departments Service Department
Basis of Total Machine Machine Assembly Stores Maintena
nceApportioning Shop X Shop Y
000’s
Indirect
Wages
Allocated 362 100,000 99,500 92,500 10,000 60,000
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Indirect
Materials
Area
occupied
253 100,000 100,000 40,000 4,000 9,000
Lighting
Heating
& Area
Occupied
50 10,000 5,000 15,000 15,000 5,000
Rent Area
Occupied
100 20,000 10,000 30,000 30,000 10,000
Insurance &
Machinery
Book value
of Machinery
15 7,947 4,967 993 497 596
Depreciation
of Machinery
Book value
of Machinery
150 79,470 49,669 9,934 4,967 5,960
Insurance of
Building
Area
Occupied
25 5,000 2,500 7,500
7,500
2,500
Salaries
Works
of No.
employees
of 80 24,000 16,000 24,000 8,000 8,000
Sub Totals 1,035 346,417 287,636 219,927 79,964 101,056
Re-
of service
Stores Dept. 39,982 29,987 9,995 (79,964)
Maintenance 48,507 32,338 20,211 (101,056)
Totals 434,906 349,961 250,133 0 0
Working Note
Lighting & Heating: Machinery X 10/50 x £50,000 — f10,000
Machinery Y 5/50 x £50,000 — £5,000
Assembly 15/50 x £50,000 — f 15,000
Stores 15/50 x £50,000 = £15,000
Maintenance 5/50 x £50,000 = £15,000
Rent Machinery X 10/50 x £100,000 = f20,000
Machinery Y 5/50 x £100,000 = £10,000 Assembly 15/50 x £100,000 =
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£30,000 Stores 15/50 x £100,000= £30,000 Maintenance
5/50 x £100,000 = £10,000
Insurance & Machinery Machinery X 800/1510 x £15,000 = £7,964
Machinery Y 500/1510 x £15,000 — £4,966 Assembly 100/1510 x :E15,000 —
£994 Stores 50/1510 x £15,000= f 497
Maintenance 5/1510 x f15,000= £596
Depreciation of Machinery Machinery X 800/1510 x £150,000 = £79,470
Machinery Y 500/1510 x £150,000 = £49,669 Assembly
100/1510 x £150,000 = £9,934
Stores 50/1510 x £150,000 — £497
Maintenance 60/1510 x £150,000 = £596
Insurance of Buildings Machinery X 15/50 x £25,000 — £5,000
Machinery Y 5/50 x £25,000 = £2,500
Assembly 15/50 x £25,000 = f7,500 Stores
15/50 x £25,000 — £7,500
Maintenance 5/50 x £25,000 = £2,500
Salaries of works mgmt. Machinery X 3/10 x £80,000 = £24,000
Machinery Y 2/10 x :E80,000 = £16,000
Assembly 3/10 x £80,000 = £24,000
Stores 1/10 x £80,000 — £8,000
Maintenance 1/10 x £80,000 = £8,000
Reappointing workings: based on material issues
Machinery X 400/800* £79,964 = £39,982
Machinery Y 300/800 * £79,964 = £29,987
Assembly 100/800 * £79,964 = £9,9995
Based on time spent
Machinery x 12/25 * £101,056 = £48,507
Machinery y 8/25 * £101,056 = £32,338
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Assembly 5/25 * £101,056 = £20,211
Overhead absorption rate workings
Departments = Total / actual machine hours per dept
Machinery X = £ 434,906/ 80,000 = £5.44
Machinery Y = £349,960/ 60,000 = £5.83
Assembly = £250,134/ 10,000 = £25.01
Overhead absorption rate
Machinery X= 434906/80000=5.44
Machinery Y= 349960/60000= 5.83
Assembly=250134/10000=25.01
Computation of absorption rate
£ £
Materials 8
Labour 15
Overheads
X (0.8*5.44) 4.34
Y (.6*5.83) 3.5
Assembly (.1*25.01) 2.5
Total cost 33.35
Allocation of cost of support departments on the basis of machine hours
Machine shop X Machine shop Y Assembly Total
Store £39,982.00 £29,987.00 £9,995.00 £79,964.00
Maintenance £45,807.00 £32,338.00 £20,211.75 £101,056.00
Total £434,906.00 £349,961.00 £250,133.00
Allocation of criteria of cost
Particulars Description
Indirect wages and supervision As per the provided amount.
Indirect materials As per the provided amount.
Light and heating On the basis of area occupied
Rent On the basis of area occupied
Insurance and machinery On the basis of book value of machine
Depreciation of machinery On the basis of book value of machine
Insurance of building On the basis of area occupied
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Salaries of works management On the basis of number of employees.
Units to be produced
Material cost £400,000.00 £300,000.00 £100,000.00
per unit material 8 8 8
A/B no. of units 50000 37500 12500
Overhead absorption rate
Machinery X 434906/80000=5.44
Machinery Y 349960/60000= 5.83
Assembly 250134/10000=25.01
Computation of absorption rate
Exquisite calculation
£ £
Materials 8
Labour 15
Overheads
X (0.8*5.44) 4.34
Y (.6*5.83) 3.5
Assembly (.1*25.01) 2.5
Total cost 33.35
1.4 Analyzing cost of Exquisite
Table 2: Absorption rate according to labour hours
Elements Cost
Machinery X 434908/200000= 2.17
Machinery Y 349960/150000= 2.33
Assembly 250134/20000= 2.15
Table 3: Cost of Exquisite
£ £
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Materials 8
Labour 15
Overheads
X (2*2.17) 4.34
Y (1.5*2.33) 3.5
Assembly (1*1.25) 1.25
Total cost 32.09
According to above calculated information, it has been found that almost changes are
taking place in per unit absorption rate. Under this, it can be said that absorption from labor hour
is one of the effective methods to determine the total cost of product. Further, selected or applied
technique proves to be effective in deriving valid results as well as long term benefits for
corporation (Kinney and Raiborn, 2012).
TASK 2
2.1 Preparing and analyzing cost report
Table 4: Cost report
Budgeted cost (£) Actual cost (£)
Variances
(£)
Particulars
Units 2000 1900
Material cost 24000 22800 1200 (A)
Labor cost 18000 19000 1000 (F)
Fixed overhead 15000 15000 -
Prime cost 57000 56800 -
Electricity
Fixed portion 500 500 -
Variable portion 8000 7125 875 (F)
Maintenance 5000 5000 -
Total production cost 70500 69425
Table 5: Standard budget
Budgeted cost (£) Budgeted cost (£)
Particulars
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Units 2000 1900
Material cost 24000 22800
Labor cost 18000 17100
Fixed overhead 15000 15000
Prime cost 57000 54900
Electricity
Fixed portion 500 500
Variable portion 8000 7125
Maintenance 5000 5000
Total production cost 70500 67525
Variable cost= (8000-5000)/ (2000-1200)
Here, it has been found that maintenance cost associated that corporation will not be
changed. This is because it occurs on slot of 500 so it shows that decreases by 100 units do not
bring any kind of changes in the cost scenario.
Variance analysis of budget
Material cost: The variance derived from budget is analyzed effectively in order to determine the
growth potential of company (Vanderbeck, 2012). Here, the amount of variation has no
significant impact on per unit cost of product and service. However, nature of material also
changes very frequently.
Labour cost: The report of cost is showing that there is variance of 1000. However, the actual
variance of 1900 units is high as labor per unit cost is 9 whereas 10 is the actual labor cost. It
has negative impact on corporation because of payment of additional amount by 1.
Fixed overhead: There is no any variance in the fixed budget as it does not vary as per the
volume of production (Cole and Breesch, 2012). Furthermore, it does not matter whether there is
any increase or decrease in the flow of production. It affects pricing strategies of products and
services to a great extent.
Electricity: These kinds of expenses are semi variable in nature because some of its parts remain
fixed and rest of the parts are variable. Here, portion of variable electricity is favorable.
However, fixed is constant whereas variable part of selected cost is decreased from the budgeted
amount.
Maintenance: Under this, no kind of changes are impacted the costing of products and services
that are produced by Jeffery and Son's. This is because of no impact due to decrease in 100 units.
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It depicts that corporation can easily evaluate performance and select decision related to pricing
policy (Kate-Riin Kont, 2012).
2.2 Using performance indicators to identify areas for potential improvement
The performance indicators are most imperative aspect through which Jeffrey and Son's
ltd can recognize the areas where improvement are needed. Here, following indicator are major
which are considered in order to bring improvement in the current performance of corporation.
These are explained as follows-
Financial statement-It is the most important aspect to assess the performance of organization.
Under this if management find that ratio of profitability is going down and liquidity is not
maintained (Weygandt and et. al., 2009). In that case management can lay emphasis on assessing
the causes behind poor performance and accordingly effective strategies need to be taken. It
assists corporation to change the internal environment of organization and maintain liquidity.
Increasing base of customers-In this management increasing customer base is effective
indicator which shows that corporation is performing good in the marketplace. On the other
hand, if numbers of customers are decreasing then it depicts that company need improvement in
its product and services (Key Performance Indicators. 2014). Also, focusing enhancing customer
base of business can have positive impact on firm and stronger customer base represents that
business is performing efficiently and all its customers are satisfied with the range of products
being offered to them. Apart from this, corrective measures can be easily taken with the motive
to improve customer base of the business and this will be beneficial for organization in near
future also (Vanderbeck, 2012).
High sales turnover: It can be an effective performance indicator for business enterprise where
rise in sales volume can support enterprise in knowing that overall performance of company is
increasing at faster pace. Further, with the help of this it is possible for management to identify
the major areas where improvement is required in terms of performance. High sales turnover not
only represent efficiency of business also helps in knowing the appropriate areas where
improvement is possible so that organization can enhance its sales volume. By focusing on
improvement company can easily gain competitive advantage and it is possible to utilize all the
resources in effective manner and in turn it can act as development tool for enterprise (Needles
and Crosson, 2008).
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Gross profit ratio: This ratio is also regarded as one of the most effective performance indicator
for business through which it is possible for management to know about the profits earned by
business and in turn it can be ensured whether all the resources are utilized in efficient manner or
not (Vance, 2002).
ROCE: This ratio is also one of the indicators which represents efficiency of the business and
supports in knowing the overall return which has been obtained by business by employing
capital. In short, it can be known whether all the financial resources are utilized efficiently by
Jeffrey and Sons or not.
EPS: This ratio supports business in knowing the efficiency of business and it is the portion of
firm’s profit which is allocated to each outstanding share of common stock (Kinney and Raiborn,
2012). It shows the profitability level of the business and provides information the stakeholders
regarding overall performance of Jeffrey and Sons in the market.
Debtor collection period: It supports in highlighting the average time taken to collect trade debts
by business. Further, this ratio can support Jeffrey and Sons to know overall efficiency of the
business.
2.3 Ways to reduce cost and enhance value, quality
Different effective ways are present with Jeffrey and Son's ltd which business can
undertake with the motive to reduce overall cost and enhancing value along with quality of the
commodity. Such ways are as follows:
Kaizen costing: This technique assists enterprise in enhancing overall level of the operations
being carried out. Further, it becomes easy for management to accomplish desired goals along
with objectives if proper costing method is employed. Moreover, business can easily enhance
motivation level of its workforce and they will prefer to take more initiative for welfare of the
business (Theeke and Mitchell, 2008). On the other hand, major costs can be saved which is
linked with wastage in the production process.
Total quality management: This technique supports management in enhancing the quality level
of the product along with major cost associated with production can be saved easily. Through
this, it is possible for business to identify the major areas where improvement is possible and in
turn it acts as development tool for enterprise. Further, it can assist Jeffrey and Son's ltd in
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enhancing overall satisfaction level of its target market as quality products will be delivered to
them which is above their expectation level (Lampe and Hofmann, 2013).
Therefore, in this way these two techniques are effective for business where considering
them can support Jeffrey and Son's ltd to enhance quality level and major costs can be saved
easily.
TASK 3
3.1 Purpose and nature of budgeting process
Purpose of budgeting process
Budgets are defined as the statements which are being developed in order to forecast for
future operational task. Undertaking process of budgeting supports Jeffrey and Sons to estimate
for future expenses along with revenue so that overall resources can be utilized in appropriate
manner. Further, it is possible for business to know about overall expenses and level of profit or
loss can be determined easily.
Nature of budgeting process
In the process of budgeting all the key estimations are made by Jeffrey and Sons after
undertaking all the values of last accounting period. Further, this estimation assists in knowing
about the possible amount of cash. Moroever, large number of aspects are undertaken which are
production, material and labor (Mock, Coram and Monroe, 2011). All the major expenses of the
business are deducted from the profits of firm and this helps in knowing the deficit level or
surplus. Therefore, this is one of the main advantages of reviewing budget on continuous basis.
3.2 Selecting appropriate budgeting methods for organization
There are several kind of budget methods which can be used by management in
accordance with their requirement. Different kind of budgeting methods are explained as follows
which aid to carry out operation of corporation with certainty-
As per the needs of organization, below three different budgeting methods are detailed
which will help the business to maintain its information in appropriate manner:
Operational Budget: Organization prepares this budget by considering all the operational
activities of the business (Vance, 2002). This budget include the activities related to the
production, marketing, manufacturing, selling, advertising and many other daily activities related
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to business. Company prepares this budget on monthly basis and on the basis of which strategies
are planned.
Zero base budgeting: In zero base budgeting the budgets which are planned without considering
the process of traditional budgeting or it can be said that entire new budget is prepared without
considering the previous results. In other words, this budgeting is based on reverse process of
traditional method (Young, 2008). In zero base budgeting the budget starts from zero base and it
does not consider the past results. Every year organization prepares fresh budget for its business.
Incremental budgeting: Organization prepares the incremental budgeting on the basis of previous
results of budget, this budget is prepared by considering the changes which were observed in
previous budgeted results. It is also follows the actual results of previous budget. Figures which
are considered in incremental budgeting is always based on the figures of previous period and
also ensures that an appropriate flow of funds is considered in this budget or not.
3.3 Preparation of different types of budget
Different kind of budgets are prepared as follows by taking into account give case
scenario-
Table 6: Production budget
Particulars July August September
Units to be sold 105000 90000 105000
Add-ending inventory 13500 15750 16500
Total need 118500 105750 121500
Less: beginning
inventory -11000 -13500 -15750
Units to be produced 107500 92250 105750
Table 7: Material purchase budget
Particulars July August September
Units to be produced 107500 92250 104250
Material cost (£) 3.5 3.5 3.5
Material to be purchased (£) 376250 322875 364875
Add: cost of material in ending inventory
(£) 80718.75 91218.75 91218.75
Total cost of material needed (£) 456968.75 414093.75 456093.75
Less: Cost of material in beginning
inventory (£) -166400 -80718.75 -166400
Cost of material to be purchased (£) 290568.75 333375 289693.75
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3.4 Preparing of cash budget
Table 8: Cash budget
Particulars July (£) August (£) September (£)
Cash inflow
Sales receipts 900000 731250 864000
Cash outflow
Purchase 365969 334688 372531
Labour 322500 276750 317250
Variable O/H 108500 98350 100350
Fixed O/H 75000 87500 87500
Net cash flow 28031 -66038 -13631
Opening balance 16000 44031 22007
Closing balance 44031 -22007 -35638
Working note: 1
Sales (£) July (£) August (£) September
(£)
May 855000 85500
June 990000 247500 99000
July 945000 567000 236250 94500
August 810000 486000 202500
September 945000 567000
July receipts August receipts September receipts
10%*855000 May 10%*990000 10%*945000
25%*990000 25%*945000 25%*810000
60%*945000 60%*810000 60%*945000
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Working note:2
Labour
July 1075000*3 322500
August 92250*3 276750
September 105750*3 317250
Working note:3
July (£) August (£) September (£)
June 44000
July 64500 43000
August 55350 36900
September 63450
Total 108500 98350 100350
Based on June' s Sales = 40% * 110000 and it should be based on production of June and
the difference is in immaterial.
40%*110000 units = 44000*1 = £44000 from June and payable in July
60%*107500 units = 64500*1 = £64500 from July and payable in July
40%*107500 units = 43000*1 = £43000 from June and payable in Aug.
60%*92250 units = 55350*1 = £55350 from June and payable in Aug.
40%*92250 units = 36900*1 = £36900 from July and payable in Sept.
60%*105750 units = 55350*1 = £63450 from June payable in Sept.
Table 9: Production cost
July August September
Material cost (£) 3.5 3.5 3.5
Wages (£) 3 3 3
Variable overhead (£) 1 1 1
Total variable cost (£) 7.5 7.5 7.5
Fixed overhead (£) 100000 100000 100000
Units to be produced 107500 92250 104250
Total variable cost (£) 806250 691875 781875
Total production cost (£) 906250 791875 881875
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Table 10: Sales budget
July August September
Units to be sold 105000 90000 105000
Sale price 9 9 9
Sales 945000 810000 945000
TASK 4
4.1 Calculating of variance
The variance of given scenario has been calculated as follows-
Table 11: Variance
Particulars Budgeted Actual Variance
Nature of
variance
Per unit Total Per unit Total
Sales revenue (A) 4/unit 14000 3.95/unit 13820 -180 Adverse
Material Cost (a) 2.4 per kg 3360 2.4 per kg 3420 60 Adverse
Labor charges (b) 8 per hour 2800 7.80 /hour 2690 -110 Favorable
Fixed overheads (c) 4800 4900 100 Adverse
Total Cost (a + b +
c) 10960 11010 50 Adverse
Actual profit (A-
Total cost) 3040 2810 -230 Adverse
As per the above table it is found that there is variance in the actual and expected
performance of Jeffrey and Son’s. The table is showing that budgeted sales was 14000 but the
actual sales is 13820. It depicts that there is negative variance of 180. Further, it was expected
that material requirement will be 3360 but actually it is 3420. It has potential impact on
performance of corporation. In addition to this, fixed overheads were expected to be 4800 but
actual expenses were 4900. It is showing that forecasting was not appropriate through which
management faced issue. Apart from this, profitability was expected to be 3040 but in real it was
2810. Here, the only favorable variance has been found in the labour charges.
Here, it is very important for management of Jeffrey and Son’s to estimate future profit
and loss so as to assess the scenario effectively and reduce the gap between actual and expected
profitability. Also, material should be handled appropriate by undertaking suitable method so as
to forecast inventory properly. In this regard updated technologies can be used to keep detail
related to material. Furthermore, labour charges should be estimated effectively so that company
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can set right target in order to give upward move to company (Youseef, 2013). However, the
shown variance are profitable in term of growth and perspective of organization. It is because
favorable variance is there which leads to reduce expenses and increase profitability in the same
manner. Similarly, workforce can be provided training and their level of knowledge should be
enhanced through which performance can be improved to a great extent.
The material prices variances
(Actual price * actual quantity purchased) – (Standard price* actual quantity purchased)
£3420- (£2.40*1425kg)= 0
The material usage variance 60(A)
SQ (3500 Units x 0.4) X SR (£2.40) = £3420
The labor variances
AH(345Hrs) X AR (£7.8 ) =£2690
The labor variance rate 70 (F)
AH(345Hrs) X SR (£8.0 ) =£2760
the labour efficiency variance
SH (3500 Units x0.1)350hrs X SR (£2.40) = £2800
(Actual hours* standard wage rate)- (Standard hours * standard wage rate)
(£8*345)- (0.1hrs * 3500)* £8) = £40favorable
Fixed overhead
Actual fixed overheard = £4900
The fixed overhead expenditure variances 100(A)
Budgeted fixed production overhead = £4800
Fixed overhead volume variance
Budgeted fixed overhead – (Actual output * standard cost)
£4800- (3500*£1.20) = £600 unfavorable
Sales price variance
(Actual selling price* actual sales volume) – (standard selling price* actual sales volume)
£13820- (£4*3500)= £180 unfavorable
Sales margin volume variance
(Actual sales- budgeted sales) * Standard profit margin
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(3500 units – 4000)* £1.04 = £520 unfavorable
Budget
Original Flexed Actual
Output (Production
and sales units )
4000 3500 3500
£ £ £
Sales revenue 16000 14000 13820
Raw materials -(3840) (3360) (1400)Kg (3420) (1425Kg)
Labour -3200 (2800)(350Hrs) (2690)(345Hrs)
Fixed overheads -4800 -4800 -4900
Operating profit 4160 3040 2810
4.2 Preparing of reconciliation operating statement
Reconciliation operation statement is made with aim of assessing causes behind different
in the actual and budgeted profit (Cole and Breesch, 2012). By assess results of this statement
management can easily assess profitability and bring positive results in the performance of
company. Moreover, by this way company bring favorable situation where growth and prosperity
can be determined in an effectual manner. In this regard, reconciliation of operating statement
has been prepared as follows-
Particulars Amount (in £)
Budgeted profit 3040
Less: Variance of sales -180
Less: Variance of cost -60
Add: Labor 110
Less: Overhead -100
Actual profit 2810
The aforementioned reconciliation operating statement depicts that actual profit of
Jeffrey and Son’s is less than £230. The main reason behind increasing variance is low price per
unit and high expenses incurred on overheads as well as material. On the other hand, favourable
results of labour variance is contributing towards profit level of company by £110. Here,
decrease in per unit labour cost payment aid to increase profitability.
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Statement of operating income
£ £ £
Favorable Adverse Total
Budgeted profit (4000
units * £ 1.04)
4160
Sales price variance (180)
Sales margin volume
variance
(520)
Material price variance 0
Material usage
variance
(60)
Labor rate variance 70
Labor efficiency
variance
40
Fixed overhead
expenditure variance
(100)
Fixed overhead
capacity variance
(600)
Total variance 110 (1460) (1350)
Actual profit 2810
4.3 Findings to management in accordance with identified responsibility centres
To: Managing Director
From: Finance manager
Subject: Report in accordance with the identified responsibility centers
Date: 23rd Jan 2016
According the analysis of reconciliation operating statement it can be said that different
departments like production, sales and HRM need some modification. In this regard effective
strategies need to be taken in each respective department so as to improve performance of firm.
These are explained as follows-
Sales department-For sales department it is very important to conduct market research and
assess the need and preferences of consumers. This department should have qualified and
competent workforce who can support all related department like planning and production in
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order to reduce variance in the actual and expected results.
Human resources department -Under this department human resources management should take
effective strategies to enhance level of motivation as well as satisfaction among workforce. In
this regard employees should be provided both non-monetary and monetary rewards. Also, they
should be provided to training to complete their work on right time.
Production department-Under this department, management of Jeffery and Son's should ensure
that waste material should be reduced to a great extent. Company should use right kind of
technology to speed up in the flow of production so as to reduce time taken to produce and also
reduce overheads.
Variance Who is responsible
Sales price variance Sales manager
Sales margin volume variance Sales manager
Material price variance Buying manager
Material usage variance Production manager
Labour rate variance HR manager
Labour efficiency variance Production manager
Fixed overhead expenditure variance Various managers
Fixed overhead capacity variance Various managers
Above shown is the responsibility centre of Jeffrey and Sons where for each variance
different employees of the firm are responsible. In case of sales price and margin volume
variance sales manager of firm is responsible who ensures that sales of the firm are as expected
or not. Further, in case of material price variance buying manager is responsible who ensures that
material purchased is utilized appropriately or not. For material usage variance production
manager holds responsibility who looks after that material is appropriately used in the production
process. For labour rate variance HR manager of Jeffrey and Sons is responsible who ensures
that proper wages are provided to the labour of firm. Labour efficiency variance is under control
of production manager. Apart from this fixed overhead expenditure variance and overhead
capacity variance is under control of various managers of firm.
21

CONCLUSION
The aforementioned report concludes that management accounting is core financial
activity for any organization. It includes number of costing methods and budgeting aspects so as
to give certainty for future business activities. It can also be said that continuous improvement
should be done at workplace to improve the performance of overall organization through using
effective techniques like costing. In addition to this, performance indicator like profitability,
sales turnover and customer satisfaction are imperative factors by which management identity
potential areas to bring improvement. Furthermore, quality management facilitates to enhance
level of satisfaction and it must be present internal process of company.
22

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