Management Accounting: Computation of Variances and Make-or-Buy Decision

This report discusses the computation of sales price variances, sales volume contribution variances, material price planning variance, and material price operational variance. It also analyzes the merits and demerits of using variances to determine managers' performance. Additionally, it includes a case study on the make-or-buy decision for a cleaning agent.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
(i) Computation of the Sales price variances and sales volume contribution variances:.............3
(ii). Computation of material price planning variance and material price operational variance: 4
(iii). Comprehend analysis of all substantial merits and demerits linked with variances use in
determining managers performance:...........................................................................................5
PART B...........................................................................................................................................8
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Management accounting concept has become an indispensable aspect of management
in present complicated industrial environment , Management Accountant directs and assists
management at each and every stage. Management accounting just not only improves
administrative productivity but also improves employee productivity. Accounting management
enhances the productive capacity of the company concern. The objectives of the various
company divisions are defined in detail as well as the accomplishment of these objectives is used
as a metric for evaluating their performance (Matiukha and Rovnyagin, 2020). This report
thoroughly discuss about vital merits as-well-as demerits of variances application in ascertaining
performance of business managers. There is also numerical task relating to assessment of
different variances like sales price variance, sales volume contribution variance, material price
operational variance and material price planning variance. Moreover, the report consists of
discussion on role of make or buy decisions based on the case-study of XLG corporation.
PART A
(i) Computation of the Sales price variances and sales volume contribution variances:
Sales price variances
XLG case study provides following information as summarised below for calculation
purpose:
Overall units quantities sold: 1600 units
Material price variance: £27000 F
Sales and Contribution:
Chemical : X Chemical : Y
Budgeted aggregate sales 595 units 595 units
Actual volume of Sales 850 units 750 units
Sales price: (Standard) £ 35 £ 30
Sales price: (Actual) £ 45 £ 37
Standard profit margin £ 25 £ 20

Sales price variance = (Actual Price – Standard Price) * Actual Unit
Chemical : X
Sales Price Variance (X) = (45 – 35) * 850 = 8500F
Chemical : Y
Sales Price Variance (Y) = (37 – 30) * 750 = 5250F
Sales volume contribution variance = (Actual no. of units sold × Budgeted price per unit) –
(budgeted number of units sold × Budgeted price per unit)
Chemical X
Sales volume contribution variance (X) = (850 * 35) – (595 * 35) = 8925 F
Chemical Y
Sales volume contribution variance (Y) = (750 * 30) – (595 * 30) = 4650 F
(ii). Computation of material price planning variance and material price operational variance:
XLG case study provides following information as summarised below for calculation
purpose:
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
(B) Actual Sales Quantity x Standard Margin 750 * 20 15000
Material price planning variance (A – B) = 38550
(iii). Comprehend analysis of all substantial merits and demerits linked with variances use in
determining managers performance:
Variance Analysis is study of variances in elements of the traditional costing system.
This is the study and evaluation of the variables that caused the variations between the
established expectations and actual performance, with an aim to removing inefficiencies. The

variance analysis indicates points of strengths and vulnerability, but does not suggest what step,
if any, must be required. The managers should be prepared to accurately perceive the meaning
of variances/differences before they can implement control actions. All preparation is focused on
projections (e.g. rates, costs, quantities) and actual results would never be exactly in conjunction
with any of these forecasts. Certain variance is inevitable (Sohl, Vroom and Fitza, 2020).
Variations produced under the standard costing framework must be reported to managers for
remedial actions. Until any action is taken, management must seek to identify the triggers of
these variances. Command is a subjective instead of an absolute term in business
entity. ,variance analysis relates to MA, that is used to analyse the variances in financial results
from standards laid down in organisations budgets. Under it, differences between the actual
costs and its planned or benchmark cost is divided into price/quality element. This has been
found that there is a desirable difference where production exceeds supply or when price charged
for products and services is greater than expected. The adverse variation exists if output is below
inputs or when demand for products and services is higher than expected. Variance allows to
define roles so that managers can recognize the individual liable for bad results. For
illustration, adverse material usage variation may suggest that excessive material costs were
attributable to the inappropriate utilization of materials. It makes it possible for the
administrators to assess the liability of supervisor in charge of specific process
wherein inefficiency arose (Wen and Siqin, 2020). It could be uncovered that the difference was
triggered by (say) improper handling, the procurement of low quality products or the jobs of
apprentices. The key point is that cause for the difference should be defined, clarified and,
wherever possible, corrective action undertaken. In this context, here below is analysis of merits
and key demerits related to the application of variances in finding and ascertaining actual-
performance of managers, as follows:
Merits:
 Organizations can achieve higher cost control through establishing benchmarks for each
sort of cost accrued and then outlining variances — in cases where things have not gone
as planned. Variations offer a baseline for evaluating the efficacy of managers in-terms
of managing costs for that they are liable (Chang, van Witteloostuijn and Eden, 2020).
 Once management sets acceptable cost expectations and continues to monitor production
costs, potential real costs will be similar to the target. As a consequence, management

may consider standardized costs and variances in the creation of more reliable budgets as
well as in the calculation of work bidding costs. A simple cost structure may be of
interest to upper executives in planning process and decision-making.
 The analysis of variances may result cost savings. Application of variances that
encourage employees and managers to become cost-conscious and to try efficient
methods of accomplishing their work. Only after employees are involved in cost
management will businesses truly be effective in cost controlling.
 The relation among a set of different variances items may also be defined by means of
method of the variance analysis. Correlations (relational positively and negatively) are
essential to business plans. For example , the study of variances may demonstrate that, if
sales towards Product A increase, there is corresponding increase in revenues for Product
B. This indicates a positive relationship among 2 products.
 Evaluation of variances when applied properly and appropriately is a method that allows
decision makers at all levels to recognize whether assets aren't fully exploited or where
change is needed.
 The study of variance enables the transfer/allocation of roles and involves management
systems in organizations where possible. Of instance, if the difference in labor
productivity is considered to be adverse or the variation in cost of production of raw
materials is adverse, management may improve the regulation of these divisions in order
to maximize output (Kristensen, 2020).
 The study of variances helps control annual budgets by analyzing the budgeted estimates
and contrasting them with the real revenues/costs. In the situation of project-driven or
program-driven organizations, financial results are recorded at crucial cycles such as
month-end, quarter-end, etc. For instance, month-end reports may only include
quantitative details on level of income and expenditure or inventory. Nevertheless, the
study of variances will help to clarify the factors behind variances between expected and
real revenues / costs that could result in changes in business plans and ultimate goals.
Demerits:
 The determination of materiality parameters of variances can be problematic. This is the
duty of management of each corporation to assess what comprises a substance or
abnormal variance. Since materiality requires individual judgements, several problems or

contradictions can occur in the concept of materiality limits (Serrano, Ramírez, and
Gascó, 2018).
 Employees may not always mention any anomalies or variances. When management only
examines unexpected anomalies, staff can not disclose adverse exceptions to budget or
attempt to mitigate these variations in order to mask inefficiency. Employees who excel
in concealing variances are reducing effectiveness of budgeting (Callus, 2019).
 The management policy by contrast concentrates on unusual variations. Management also
concentrate on adverse variance while overlooking favourable variances. Employees may
assume that bad performance gets recognition while great result is overlooked. As a
consequence, morale of these employees is likely to suffer.
 Analysis of variances once done only offers the sum that shows the difference in
profits or revenues. Decisions can not be focused on just this slight bit of knowledge. A
thorough investigation is needed to test the causes for the existence of a variation, even
though it was beneficial one. This review is yet another time-consuming mission.
Examination of variances is worthless without any further review of these discrepancies
between budgeted and real quantities (Farkas, Kersting and Stephens, 2016).
 Variances may be exploited by staff members because of their own need. Management
can take erroneous steps to achieve a desirable variance or to prevent adverse variances.
For instance, the organisation could buy greater units of lower quality products at a lower
price only so that material usage variation can be favourable. Workers may also attempt
to mask/hide unfavourable variances in order to cover up their shortfalls or to help them
at personal level.
PART B
The decisions to make or buy relates to an organisation's difficulty of determining if a
product should be bought from outside markets or produced internally. Theoretically, any item
currently bought by an outside manufacturer is also a subject for internal manufacturing and any
item currently made in house is future purchasing subject. Majority of choices to make or buy
are taken on basis of price. Nevertheless, this is only one major requirements to be considered in
this strategic judgement. Some non-cost considerations promote long-term relationships with
manufacturers to help maintain performance and quality rates and facilitate innovation in
sufficient infrastructure and innovative ideas. The make-or-buy study is carried out at the tactical

and managerial scale (Brahm and Tarzijan, 2016). Variables viewed at the strategic stage provide
an study of future as well as of present environment. Concerns such as regulation, rival
companies, and market dynamics all have strategic effect on the decision-making process.
Making or buying decision has potential to save business money when manager conclude
that company can decrease its costs by making a item. Manufacturing these things would
definitely raise other associated costs, though, and manager need to weigh production savings
against increased expenses to see if manufacturing products at home or purchasing them
from outside supplier makes most economic sense (Zimmermann, Müller and Heinrich, 2016).
The provided case-study relating to XLG organisation is also based on make-or-buy
decision. In respective case-study scenario management wants to take make-or-buy decision in
relation to famaQ. For company fama Q i.e. superior quality cleaning agent is significant item in
production which provides it competitive advantages. This item is secured by patent and
company XLG wants to make it in-house. Company import fama Q form Brazil and Due to
country-wide lock-down announced by UK government and restrictions, this has been expensive
for company to import it. Now after lock-down company has to import it by air transport rather
than sea-transport which has increased the unit price to 4.5 per unit and actual paid price is 3.7
per unit.
Now company is considering to in-house fama Q due to such extraordinary situation.
Mainly price is major factor in determining make-or-buy decisions. Original standard price of
fama Q is 2.5 for each single unit. Cost of making fama Q is 3. Additional significant fact given
here is that in-housing option will provide reduction in delivery-period of 15 days. Thus
considering all such information as reviews above, following is make-or-buy decision analysis in
context of fama Q, as follows:
Analysis of Making Decision:
The below presented table shows impact of decision of corporation as to in-housing
making of fama Q:
If In-housing
production of
fama Q: Chemical X Chemical Y
Budgeted (595 Actual (862.75 Varian Budgeted (595 Actual (862.75 Varian

units) units) ce units) units) ce
Selling Price 45 26775 45
38823.
75
12048.
75 35 20825 37
31921.
75
11096.
75
Cost of
Chemicals 20 11900 20 17255 5355 10 5950 17
14666.
75
8716.7
5
Increase in
cost due to in-
house of
production of
Fama Q 0.5
431.37
5
431.37
5 - 0.5
431.37
5
431.37
5
Total Cost 20.5
12197.
5 21.2
17686.
375
5488.8
75 10 5950 17.5
15098.
125
9148.1
25
Profit Margin 24.5
14577.
5 23.8
21137.
375
6559.8
75 25 14875 19.5
16823.
625
1948.6
25
Working Note:
Computation of Demand(units) based on the new scenario: (Demand expected to be risen
by 45 percent)
Chemical X 595 units + 595 units *45% = 862.75
Chemical Y 595 units + 595 units * 45% = 862.75
Analysing the decision of buying fama Q this has been ascertained that there will be
increment in profit scale by 6559.87 and 1948.62 in case of production of chemical X and Y
respectively. Also in both cases actual profits will exceed the normal budgeted profit level.
Analysis of Buying Decision:
If Imports: Chemical X Chemical Y
Budgeted (595 Actual (850 Varian Budgeted (595 Actual (750 Varian

units) units) ce units) units) ce
Selling Price 35 20825 45 38250 17425 35 20825 37 27750 6925
Cost of
Chemicals 10 5950 20 17000 11050 10 5950 17 12750 6800
Incremental
cost due to
importing of
Fama Q - 1.2 1020 1020 - 1.2 900 900
Aggregate
Cost 10 5950 21.2 18020 12070 10 5950 18.2 13650 7700
Profit Margin 25 14875 23.8 20230 5355 25 14875 18.8 14100 -775
Analysis of presented table shows that in case of chemical X this decision will lead to
increase in profit by 5355 while there will loss of 775 in case of chemical Y. Overall budgeted
profit will also be decline form 14875 to 14100 in case of chemical Y.
Thus by review of both the decision this has been determined that make decision in case
of fama Q would be more feasible and profitable. In house of item fama Q will result in increase
in profits. Company has to consider the in house of fama Q instead of buying it. As profit figures
in case of in house option is greater than with respect to both chemical X and Y as compare to
the buying/importing of fama Q. Thus here it is strongly recommended to XLG organisation to
make fama Q in house, however company has to consider other factors associated with fama Q
like competitive advantage, patent of fama Q etc before taking final decision.
CONCLUSION
From above report discussion this has been analysed that decision-making in business is
purely depends upon management accounting. This enable management to make most
profitable , relevant and efficacious decision for business. While taking a decision like make or
buy management has to review all the possible alternatives and factors which may influence

ultimate decision. Variance analysis allocates all the major strength points and weak points as to
support decisions of managers.

REFERENCES
Books and Journals:
Matiukha, M. and Rovnyagin, A., 2020. Managerial accounting as an element of information
resources management of an enterprise. EUREKA: Social and Humanities, (1), pp.3-9.
Sohl, T., Vroom, G. and Fitza, M.A., 2020. How much does business model matter for firm
performance? A variance decomposition analysis. Academy of Management
Discoveries, 6(1), pp.61-80.
Wen, X. and Siqin, T., 2020. How do product quality uncertainties affect the sharing economy
platforms with risk considerations? A mean-variance analysis. International Journal of
Production Economics, 224, p.107544.
Chang, S.J., van Witteloostuijn, A. and Eden, L., 2020. Common method variance in
international business research. In Research Methods in International Business (pp. 385-
398). Palgrave Macmillan, Cham.
Kristensen, T.B., 2020. Enabling use of standard variable costing in lean production. Production
Planning & Control, pp.1-16.
Callus, K., 2019. The relevance of standard costing and variance analysis in Maltese
bakeries (Master's thesis, University of Malta).
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.
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.
Brahm, F. and Tarzijan, J., 2016. Relational Contracts and Collaboration in the Supply Chain:
Impact of Expected Future Business Volume on the Make‐or‐Buy Decision. Journal of
Supply Chain Management, 52(3), pp.48-67.
Zimmermann, S., Müller, M. and Heinrich, B., 2016. Exposing and selling the use of web
services—an option to be considered in make-or-buy decision-making. Decision
Support Systems, 89, pp.28-40.