Financial Analysis and Budgeting for Alpha 577

Procter & Gamble, a global leader in beauty and personal care, wants to produce a new product called 'Alpha 577' which requires a single operation. The company plans to produce 10,000 units of Alpha 577 for the month of September 2014 with a budgeted contribution of €200,000, fixed costs of €120,000, and a profit of €80,000. However, actual results for October show a different picture, with sales revenue of €810,000, a profit of €18,000, and various variances between the budgeted and actual figures.

Procter & Gamble is the global leader in beauty and personal care. Its key brands here include
Olay, Gillette and Pantene. The company has however underperformed some of its rivals including
Unilever and L’Oréal, which have made significant gains in the Chinese market to Procter & Gamble’s
detriment. Procter & Gamble may suffer from being too mid-range for premium-focused China, while too
premium for lesser developed emerging markets such as India.
Proctor & Gamble wants to produce a new product codenamed ‘Alpha 577’. The product requires a single
operation, and the standard cost for this operation is presented below:
Standard Cost Card for ALPHA 577 €
Direct Materials:
2 kg of material A @ €10 per kg 20.00
1 kg of material B @ €15 per kg 15.00
Direct labour (3 hours @ €9 per hour) 27.00
Variable overhead (3 hours @ €2 per direct labour hour) 6.00
Total standard variable cost 68.00
Standard contribution margin 20.00
Standard Selling Price 88.00
Practor & Gamble planned to produce 10,000 units of Alpha 577 for the month of September 2014. It
anticipated that the Budgeted Contribution would be €200,000 and that they would have budgeted fixed
costs of €120,000 with a budgeted profit of €80,000.
The actual results for October were:
Sales (9000 units @€90) €810,000
Direct Materials:
A: 19,000 kg @ €11 per kg 209,000
B: 10,100 kg @ €14 per kg 141,400
Direct labour (28,500 @ €9.60 per hour) 273,600
Variable overheads 52,000
(€676,000)
Contribution 134,000
Fixed costs (116,000)
Profit 18,000

Required:
(a) Prepare the original budget in the same format as the ‘Results for September, clearly showing the
budgeted profit of €80,000.
(b) Reconcile the budgeted and actual profit in a table clearly showing the following variances whether
‘adverse’ or ‘favourable’ and discuss their meaning:
a. Sales margin price
b. Sales margin volume
c. Materials price
d. Material usage
e. Labour rate
f. Labour efficiency
g. Fixed overhead expenditure
h. Variable overhead expenditure
i. Variable overhead efficiency
(c) Draft a report which critically analyses the usefulness of variance analysis as part of directing
management attention in a business.
Assessment Criteria:
1. Prepare an original budget statement for October. 20%
2. Preparation of variances, with explanations along with reconciliation
from actual to budget.
40%
3. Draft a report which critically analyses the usefulness of variance
analyses as part of directing management attention in a business.
40%
Criteria
Descriptor
Preparation of Original
Budget for October
Preparation of
variances along with
explanations and
reconciliation
Draft Report
Weighting to
total 100 20 40 40
100
A (80-100) Statements correct Variances are correctly
calculated and
explanations are
thorough.
Report is of an
exceptional
standard.
B+ (70-79) Vast majority of
statements are correct
- mistakes are only of
an arithmetical nature.
Mistakes are only of
an arithmetical nature.
Report deals
with the main
issues in a
comprehensive
manner