Managing Business Performance

This document provides insights into managing business performance and standard costing. It explains the process of setting up standard costs and discusses the factors that result in adverse and favourable labour and material variances. The limitations of break-even analysis are also discussed. The document is relevant for students studying business management or accounting courses.

Managing Business
Performance

Table of Contents
PART I.............................................................................................................................................3
1...................................................................................................................................................3
2...................................................................................................................................................3
3...................................................................................................................................................5
4...................................................................................................................................................8
PART II............................................................................................................................................9
INTRODUCTION...........................................................................................................................9
Explaining the meaning of standard costing and outlining process in setting up the standard
costs.............................................................................................................................................9
Explaining factors that results to adverse and the favourable labour & material variances ....10
Critically assessing standard costing as the tool for the purpose of ensuring control...............12
CONCLUSION .............................................................................................................................13
REFERENCES..............................................................................................................................14

PART I
1.
Marginal costing
statement
Particulars Per unit(£) Volume of sales Total year 1 (£)
Selling price 12 50000 600000
Less: Variable cost 3.6 50000 180000
Contribution 420000
Less: Fixed cost 300000
Net profit 120000
2.
a.
Marginal costing
statement
Particulars Per unit(£) Volume of sales Total year 1 (£)
Selling price 13.2 50000 660000
Less: Varible cost 3.6 50000 180000
Contribution 480000
Less: Fixed cost 300000
Net profit 180000
Working note :
Old SP 12
Increase by 10% 1.2
New selling price 13.2

b.
Marginal costing
statement
Particulars Per unit(£) Volume of sales Total year 1 (£)
Selling price 10.8 50000 540000
Less: Varible cost 3.6 50000 180000
Contribution 360000
Less: Fixed cost 300000
Net profit 60000
Working note :
Old SP 12
decrease by 10% 1.2
New selling price 10.8
c.
Marginal costing
statement
Particulars Per unit(£) Volume of sales Total year 1 (£)
Selling price 12 50000 600000
Less: Varible cost 3 50000 150000
Contribution 450000
Less: Fixed cost 300000
Net profit 150000
Working note :
SP 12

Old VC 3.6
decrease to 25% of SP 3
New VC 3
d.
Marginal costing
statement
Particulars Per unit(£) Volume of sales Total year 1 (£)
Selling price 12 50000 600000
Less: Varible cost 4.2 50000 210000
Contribution 390000
Less: Fixed cost 300000
Net profit 90000
Working note :
SP 12
Old VC 3.6
Increase to 25% of SP 4.2
New VC 4.2
3.
a.
1.
Particulars Amount
Fixed cost 300000
Contribution per unit 8.4
BEP (in units ) 35714.3

Particulars Amount
Fixed cost 300000
Contrinution to sales ratio 0.7
BEP (in sales) 428571.4
Working note :
Selling price 12
Variable cost 3.6
Contribution to sales ratio (SP-VC)/SP 0.7
2.
Particulars Amount
Fixed cost 300000
Contrinution per unit 9.6
BEP (in units ) 31250.0
Particulars Amount
Fixed cost 300000
Contrinution to sales ratio 0.72
BEP (in sales) 416666.7
Working note :
Selling price 13.2
Variable cost 3.6
Contribution to sales ratio (SP-VC)/SP 0.72
3.

Particulars Amount
Fixed cost 300000
Contribution per unit 7.2
BEP (in units ) 41666.7
Particulars Amount
Fixed cost 300000
Contribution to sales ratio 0.6
BEP (in sales) 500000.0
Working note :
Selling price 10.8
Variable cost 3.6
Contribution to sales ratio (SP-VC)/SP 0.67
4.
Particulars Amount
Fixed cost 300000
Contribution per unit 9
BEP (in units ) 33333.3
Particulars Amount
Fixed cost 300000
Contribution to sales ratio 0.75
BEP (in sales) 400000.0
Working note :

Selling price 12
Variable cost 3
Contribution to sales ratio (SP-VC)/SP 0.75
5.
Particulars Amount
Fixed cost 300000
Contribution per unit 7.8
BEP (in units ) 38461.5
Particulars Amount
Fixed cost 300000
Contribution to sales ratio 0.65
BEP (in sales) 461538.5
Working note :
Selling price 12
Variable cost 4.2
Contribution to sales ratio (SP-VC)/SP 0.65
b.
Margin of safety in units and in percentage.
1 2 3 4 5
Current Sales
level 600000 660000 540000 600000 600000
Current sales
units 50000 50000 50000 50000 50000
Break even
point units 35714.29 31250.00 41666.67 33333.33 38461.54

Break even
point in amount 428571.43 416666.67 500000.00 400000.00 461538.46
Margin of
safety
(Current sales
– Break even
point) 14285.71 18750.00 8333.33 16666.67 11538.46
Margin of
safety (Sales –
Break even
point)/Sales
level 28.57% 36.87% 7.41% 33.33% 23.08%
c.
Net profit margins in percentage terms.
1 2 3 4 5
Current Sales
level 600000 660000 540000 600000 600000
Net Profit 120000 180000 60000 150000 90000
Net profit (%) 20.00% 27.27% 11.11% 25.00% 15.00%
4.
Discussion of results and limitation of exercise.
The above analysis is carried out by company for measuring the break even points in
terms of units and amount. The 5 statements have different break even points and separate units
of sales. Break even points are calculated for measuring the point at which the cost of company
will meet its revenues. The break even point of company helps in analysing the level required to
be achieved in sales for the business enterprise for the sales level (Kim and et.al., 2017). The
sales level to be achieved by the business is determined by calculating the break even point of
company both in units and terms of amount. The margin of safety is calculated for measuring the

difference between profitability & break-even point. Margin of safety is measured in both terms
of units and also in terms of amount. Margin of safety used for assessing the level of stocks
required to be kept with the business for the production and sales. Margin of safety should not be
high as it causes company to have extra carrying cost for storing the stocks of inventory. They
are used by management in budgeting and investing decisions.
The limitations of break even point is that the fixed costs of company vary after the
certain level of operations. Also the volume of sales changes the variable costs of the company
that affects the results of business operations (Kampf, Majerčák and Švagr, 2016). This do not
allow the company to make accurate declarations for the business. Margin of safety do not give
accurate analysis of the cost information carried out by the business. This do not allow company
to make accurate results of the forecasts. The margin of safety if analysed wrongly may cause the
company to incur carrying costs.
PART II
INTRODUCTION
Standard costing is the cost accounting techniques that is adopted for computing
variances present between actual and the budgeted figures. The present report provides a deeper
insights towards concept of standard costing and the process followed in setting up the standard
cost. Moreover, it also presents the reason behind favourable and adverse variances with an
importance of standard costing in ensuring effective controlling.
Explaining the meaning of standard costing and outlining process in setting up the standard costs
Standard cost refers to an estimated unit cost that is built up of the standards for each and
every element of the cost. It is the target cost that needs to be incurred under an efficient
operating circumstances. Standard cost re identified analysing expected material price, expenses
and labour, efficiency level in using labour and material, Budgeted volume and overhead cost of
an activity.
Difference between budgeted and standard costs:
 The budgeted data is reflected as the totalled of the standard cost
 Budget facilitates information about cost for an overall activity
 Standard represents the same info or the unit basis
In order to set standards the key aspect are taken into account that includes:

 Material by purchasing department- Contracts agreed, forecast movements in the prices,
pricing related discussion with the suppliers, availability of the bulk buying discounts,
quality of material needed.
 Labour- Agreements on the pay rises and reference to the payroll
Process for setting standard cost
Determining cost centre- For setting up the standard cost, it is necessary to have a cost
centre for fixing the cost and responsibility. In manufacturing enterprise, cost centres are
developed as per the no. of products manufactured & no. of the departments, divisions or the
sections are been involved in process of production. Cost centre in relation to the person known
as the cost centre of personnel and relating to equipments and the products known as impersonal
cost centre.
Classifying accounts- Cost incurs at several stages of the production process. Such costs
must be recorded adequately for making an accurate computation of the total value of the cost
incurred. Thus, there is the need for classification of the accounts for the purpose of cost control
under the system of standard costing.
Codification of the accounts- After classification of the accounts, different types of the
accounts could be codified & different symbols could be utilised for facilitating speedy
collection, reporting and communication.
Setting standards- Thereafter codification, the next step is to set standards which is an
ideal that is been anticipated and could be achieved over a future time period. Success of the
standard costing depends on reliability, genuineness and an acceptance of such standards (Tsai,
Lan and Huang, 2019). Under this three kinds of the standards are evaluated that are basic,
normal and the current standard. In this the current standard is been divided into two parts that is
ideals and an expected standard.
Establishing for the standard cost- In this step, for each and very element of the cost
separately, standard cost is been established. Generally, components of the cost is grouped as the
labour, overhead and the material. Moreover, the standard cost are also set for sales.
Preparing sheet stating standard cost- After establishing the standard cost, sheet or card
including the standard cost must be prepared separately in accordance product and process wise.

Explaining factors that results to adverse and the favourable labour & material variances
Labour variance
Labour rate variance focuses on comparing the actual hours for which the workers
worked in a particular time period with that of the proportion of cost using a standard cost for per
labour hour. Adverse labour rate variance resulted when actual cost for the hours worked
exceeds standards cost for an actual hours. However, favourable variance occurred when actual
cost for the hours worked seems as less than the standard cost for an actual hours.
Favourable labour rate variance is resulted due to many factors that are as follows-
 hiring of more an more unskilled or the semi skilled labour
 decrease in an overall rate of wages within the market because of an increase in supply of
the labour that caused because of an immigrants as result of relaxation of an immigration
policy
 Inadequately high setting of standard cost of the direct labour that might be attributed due
to an inefficient planning.
Adverse labour rate variance caused due to several factors that includes-
 Increase in national minimum wage rate
 Hiring more of skilled labour than estimated in standard
 Inefficient hiring process by HR department
 Effective negotiations by the labour unions
Labour efficiency variance reflects comparison of an actual output produced in
comparison to standard duration. Adverse variance states that an actual production took a longer
time than the standard whereas favourable variance indicates that an actual production took very
less time than the standard.
Factors causing Favourable variance
 Higher level of skilled staff
 Incorrect budgeting
 Improved motivation among staff
Factors causing adverse variance
 Lower level of skilled staff
 Decline in the motivation of staff
 Inaccurate budgeting

Material variance
Material price variance depicts the difference or variance present within an organisation
and the causes of the resulted favourable and the adverse variance are as follows-
Favourable
 Poor quality of the material
 Discount provided on bulk buying
 Change to cheaper supplier
Adverse
 Higher quality of the material
 Change to expensive supplier Unexpected increase in price
Material usage variance shows the deviation present between the quantity of actual and
the standards goods produced. The reason behind adverse and favourable results are as follows-
Favourable
 High material quality
 More and more efficient use of the material
 Change made is product specification
Adverse
 Poor quality of the material
 less experienced worker using more and more materials
 Change relates to product specification
For example-
Particulars Standard Actual
Price 10 8
Quantity 200 150
Hours 250 300
Rate 8 7
Output 100 80
Sales price per unit 50 65

Material cost variance
(Std. Quantity*Std. price)-
(Actual quantity for an
actual output*actual price)
{(200*80/100)*10}-(150*8)
(160*10)-(150*8)
400 Favourable
Material price variance
(Std. Price-Actual
price)*Actual quantity
(10-8)*150
300 Favourable
Material usage variance
(Std. Qty for actual output-
Actaul quantity)* std. Price
(160-150)*10
100 Favourable
Labour rate variance
(Std. Rate per hour-Actaul
rate per hour)*Actual hours
(8-7)*300
300 Favourable
Labour efficiency variance
(Std. Hours for actual
output-Avtual
hours)*Standard rate
(200-300)*8
-800 Adverse

Critically assessing standard costing as the tool for the purpose of ensuring control
Standard costing refers to the accounting system that is used for planning the budgets,
management and cost controls and also in evaluating the performance of business. Standards
costing involves estimating costs required in production process. The organisations are required
to set standards related to direct materials, direct labour and the standards of overhead required to
be performed in the production process. These standards are used for planning the budgets for
production process of company. Standards costs give assessment to the management related to
the costs of inputs. Standards play an important role in planning & controlling the business
activities. It have great influence over the preparation of budgetary process (Kumar, 2019).
They are the integral part of the assumptions required to be made for cost – volume profit
analysis. Standards are also used by enterprises in proper pricing of goods and services.
Standards are required to be made by the business related to costs and quantity of
components used in the production process. Standards are set after analysing the work and nature
of process it involves. For estimating the materials and its quantities company may are required
to have proper analysis of the components. Also the information related to wastage, spoilage,
evaporations and other factors that matters that will require time for improvements. Standards
could be applied to both the manufacturing as well as non manufacturing tasks (Januszewski and
Kujawski, 2016). Everyone in the company is required to perform as per the framed standards as
costs are associated with their performance.
Standard costing is an accounting system that is been used by the manufacturer or the
producer for determining the difference between actual and the standard cost. It reflects the cost
that must have been incurred for producing the actual goods. It acts as the method that is been
used for comparing standard or budgeted cost and the revenues with that of actual results for the
purpose of arriving at variances with its respective causes in order to inform management about
deviations resulted and helps in taking appropriate measures for the improvement. Standard cost
is been identified after considering all possibilities that might arise in future. It also assist in
making decisions on whether the specific project must be undertaken or not through determining
or evaluating its profitability (Kumar, 2019). Standard costing is needed for the performance
check as it acts as target to cost centres that need not to be transcended. In this situation, such
targets are counted as helpful in reviewing or checking performance by comparing with actual
figures. Standard cost are been utilised for preparing and evaluating a performance of an

executive staff based on such budgets. Thus, the main objective or purpose of standard costing is
measuring difference between standard and actual cost & in assessing them for maintaining
productivity of an enterprise.
At the end of financial years standard costing involves comparison of actual costs with
the standards costs. It includes identifying the variances related to direct materials such as
material cost variance, material price variances and the material usage variance. Labour costs are
also compared. It includes variance analysis such labour cost variances, labour cost variances
and the usage variance. It also includes variance analysis of overhead costs and fixed cost
incurred by organisation for production process. On the identification of variances of different
costs in production such as materials and labours important and corrective measures are taken by
the enterprise. Analysing the variances it identifies the areas where major deviations are seen by
organisation and also it helps in identifying the factors that are responsible for deviations.
Organisations on analysing these variations changes their policies and procedures for
reducing the variances to the minimum so that controls for keeping the costs under control can be
taken. Using the standard costing companies are taking effective measures for having effective
control over their costs and expenditures (Tsai, Lan and Huang, 2019). They figure the exact
issues whether it is related to the prices, quantity or other non monetary factors. On the basis of
this strategic and operational decisions are made by the management of business after proper
analysis of these factors. This is how standards costing helps business in having effective control
measures for the business.
This is important for increasing the profitability of business and achieving the desired
goals and objectives of business. Standard costing has helped organisation in controlling costs
and other operations. This has helped the business enterprise in establishing effective controls
that will the reduce the issues and defects in the processes that are causing the costs to go high.
The operational costs could be controlled with the variances identified using the standard
costing. Company by identifying the exact causes or reasons of variations between the cost so
that it can take control measures for reducing the costs. It may restructure its operations using the
standards costing. It has helped it to achieve the targeted objectives effectively by establishing
new and adequate strategies and processes.
A standard costing system involves estimating the required costs of a production process.
It helps business in analysing the expenses which organization faces. It helps them in evaluating

the estimated cost. It is the second technique related to cost controlling. It also provides expected
cost for an actual cost in the accounting records. The main purpose of standard costs is to provide
management with information on the day-to-day control of operations. They also provide
effective measurement so that cost can be controlled effectively.
CONCLUSION
From the above report its has been concluded that standard costing plays an essential role
in an enterprise for ensuring adequate control through taking corrective measures for resolving
the deviations present between budgeted and actual results.

REFERENCES
Books and Journals
Januszewski, A. and Kujawski, J., 2016. Case study as a research method used in controlling and
managerial accounting education. In 10th International Technology, Education and
Development Conference. IATED Academy.
Kumar, A., 2019. Standard Costing And Material Cost Variance. The Management Accountant
Journal, 54(1), pp.82-85.
Tsai, W.H., Lan, S.H. and Huang, C.T., 2019. Activity-Based Standard Costing Product-Mix
Decision in the Future Digital Era: Green Recycling Steel-Scrap Material for Steel
Industry. Sustainability, 11(3), p.899.
Kim, S. and et.al., 2017. Break-Even Point Analysis of Sodium-Cooled Fast Reactor Capital
Investment Cost Comparing the Direct Disposal Option and Pyro-Sodium-Cooled Fast
Reactor Nuclear Fuel Cycle Option in Korea. Sustainability. 9(9). p.1518.
Kampf, R., Majerčák, P. and Švagr, P., 2016. Application of break-even point analysis. NAŠE
MORE: znanstveno-stručni časopis za more i pomorstvo.63(3 Special Issue), pp.126-128.