Management Accounting Report: XLG Case Study, Variance and Risk

This report delves into the core aspects of management accounting, focusing on variance analysis and risk assessment using the XLG case study. Part A presents practical calculations for sales price variance, sales volume contribution variance, material price planning variance, and material price operational variance. It also includes a critical analysis of the merits and demerits of using variances to evaluate managerial performance. Part B explores the risks associated with importing Farma Q, particularly patent infringement, and the impact of the COVID-19 lockdown on XLG's operations, including increased selling prices due to higher import costs. The report provides a comprehensive overview of financial reporting and decision-making in a dynamic market environment.

Management
Accounting - Report

Contents
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
PART B...........................................................................................................................................9
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14

INTRODUCTION
Companies are facing issues related to taking choices and conducting business in an efficient
manner in rapidly evolving market environment. Management Accounting is the first option for
handling workers to tackle these problems because there is a broader dimension that provides
several strategies and resources that reinforce the process for strategic decision taking (Lederer,
Umlauft and Hirche, 2019). The project report deals with the main facets of managerial
accounting required to determine the sustained performance of the company. The entire analysis
is composed of two sections: A and B. First section contains practical sums relating to numerous
variance calculations that are based on XLG case study. This also includes detailed assessment
of the benefits and disadvantages in introducing variances in the measurement of the results of
handling employees. Whereas the other section covers risk, importation of Farma Q and how this
may affect XLG during lock-down related to the study given in the brief.
PART A
(I) Sales price variance and sales volume contribution variance:
Provided data:
Sum of sell unit: 1600
Material price variance: 27000 Pounds (Favourable)
Sales and Contribution:
Chemical X Chemical Y
Estimated sum of sale 595 units 595 units
Actual Sale units 850 units 750 units
Estimated selling price 35 Pounds 30 Pounds
Actual selling price 45 Pounds 37 Pounds
Standard margin 25 Pounds 20 Pounds

Sales price variance:
Chemical X
Sales Price Variance (X) : (Actual Price – Standard Price) x Actual Unit
: (45 – 35) x 850
: 8500 Favourable
Chemical Y
Sales Price Variance (Y) : (Actual Price – Standard Price) x Actual Unit
: (37 – 30) x 750
: 5250 Favourable
Sales volume contribution variance:
Sales volume contribution variance :
(Actual number of unit sold × Budgeted price
per unit) – (budgeted number of unit sold ×
Budgeted price per unit)
Chemical X
Sales volume contribution variance (X) :
(850 x 35) – (595 x
35)
8925 Favourable
Chemical Y
Sales volume contribution variance (Y) :
(750 x 30) – (595 x
30)
4650 Favourable

(ii). Material price planning variance and material price operational variance:
Given Information:
original standard price 2.50 Pounds per-unit
Increased(revised) unit price 4.50 Pounds
Material price operational variance:
Chemicals X
(A) Original budgeted sales x Standard Margin : 595 x 2.5 x 25 : 37187.5
(B) Revised budgeted sales x Standard Margin : 595 x 4.5 x 25 : 66937.5
Material price operational variance (A – B) : -29750
Chemicals Y
(A) Original budgeted sales x Standard Margin : 595 x 2.5 x 20 : 29750
(B) Revised budgeted sales x Standard Margin : 595 x 4.5 x 20 : 53550
Material price operational variance (A – B) : -23800
Material price planning variance:
Chemicals X
(A) Revised budgeted sales x Standard
Margin : 595 x 4.5 x 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 x 4.5 x 20: 53550
(B) Actual Sales Quantity x Standard Margin 750 x 20 15000
Material price planning variance (A – B): 38550
Critically analysing key merits and demerits in relation to use of variances in assessing
managers’ performance:
Effective usage of the variance assessment is an important way for a firm to meet its long-
term goals. When an entity considers a variation in a factor like material, labour, etc., it involves
understanding the significant effect of such a factor not just in disclosing its quarterly accounts
but also in reacting to such a variation would influence management activities in achieving its
goals. Variation analysis is a measurable assessment of variation between actual and expected
behaviour. This analysis is used to determine a company's influence (Zhang, 2020). That will
allow management to make major improvements and strategic choices that could render the
business more profitable in the future. It's important to realize that the study of variances doesn't
recognize market outcome issues. Alternatively, it gives management accountants and managers
an idea of where they might look for possible issues by help of calculated variances.
A variation represents both the disparity between uniform assets and the real assets needed for
the activities (Cicala, 2020). This might be a variance due to fluctuations in volume or expense
disparities. Whether the actual cost is greater than the normal cost or the planned cost, an
unfavourable variance is the disparity. If the real cost is lower than average cost or the expected
cost, the discrepancy is a desirable variation. Although the positive gap is advantageous, the
negative variance is unfavourable. Variance interconnects with certain variances. Distinctions

between variances, whether beneficial or detrimental, are important in strategy formulation. A
detailed evaluation on the main benefits and demerits of the usage of variances in the
measurement of managerial performance follows in this regard:
Merits:
• Assurance of deviation from norm or expected is the very first importance of the study of the
variances. These separations should focus the analysis on the management. The necessary
information for such a deviation shall be given to the management, in particular for unfavourable
variance (cost is beyond expected).
• The second benefit of the variation would be its value in budget limits. In case of adverse
variance administrators take fair monitoring steps (Choi, Sun and Chung, 2019). Where
sufficient reasons are not given and reasonable control steps are taken, evidence of an adverse
variation is assessed in first place.
• Potential change of expenditure projections is the third value of uncertainty or deviation
studies. If, in addition to an incorrect expenditure estimate, there is no rational justification for
uncertainty, the outlook for opportunity should be updated or revised.
• The fourth value of this variation is to assess the productivity of the supervisors and the
management controller. Good variance indicates great manger efficiency, whereas negative
variance suggests poor results.
• The fifth benefit of variation analysis is to create a system of roles and obligations within the
organization. Defining roles and obligations strengthens structures of efficiency and regulation
within the organization.
• The calculation of variances or the analysis of variances provides a reporting mechanism inside
the organization. The consequences of adverse variances (material or labour costs are above
predicted) are accountable to all.
• In certain cases, budget vs. real variances may indicate that the company's product line or
intended customer market needs to be reassessed (Lei, Liu and Zhang, 2019). There's a lot of
guesswork in planning an estimate. If such assumptions contribute to expenditure blow-up, this
could be because the fundamental projections for a variety of reasons are entirely inaccurate.
That can be as simple as an economic transition or as complicated as challenges as it comes to
getting products out to customers. The needed changes could be shown inside the organization at
the end of each day.

• This supports the organization in fulfilling its business goals and making the effective
utilization of the capital of the company. It also helps to create standards for the stakeholders
concerned. When the study of variation presents a set of results that produce large variances in
the data, it may indicate that there have been significant issues with the preparation of budgets.
Concerns can make a contribution to the use of inaccurate data or information, or database
calculation errors which used to plan either a spending plan or a real variance evaluate may
occur. Variability measurement is also a helpful means of checking the budgeting method of the
company. The organization wants to become far more mobile by making efforts to improve the
budget plan (Pogodin and Lattimore, 2019).
• Evaluation of variation is a critical form of tracking as it stats areas where actual outcome
differs from planned activities. Another advantage is that identifying areas where services are not
being utilized efficiently and places where improvements are required may be helpful. The
analysis of heterogeneity therefore promotes organizational versatility. Examination of variances
can also be used to identify areas where costs exceed and to determine if the specified uniform
costs are acceptable.
Demerits:
• Accounting department collects variances at the end of every month before sending the reports
to management. Manager requires feedback even quicker on most cases and it tends to rely on
warning signals or on-site behaviour (Ceraolo and Giorgi, 2020).
• Certain variance / variance variables are not included in accounting records, and accounting
departments will study and evaluate information such as coordinating research, spending on
supplies and payroll data to identify the triggers of such variances. This add-on procedure is cost-
effective when the management have been able to resolve the problems effectively on the
grounds of the provided knowledge.
• If budgeting does not take place on the basis of a detailed analysis of each element, the
budgeting process can be treated arbitrarily, which may vary from the actual estimates. For such
a scenario it cannot make sense to evaluate variances.
• A variance analysis has a major drawback in that it takes longer to evaluate the effects of the
variability and can therefore delay the corrective steps. The tracking system leads to a
considerable delay in time-frame and therefore would significantly postpone the emergence of
preventive measures (Su, 2020).

PART B
This is becoming extremely prevalent for purchasers to presume sellers to create binding
assurances that resale products bought from sellers would not violate third-party patents.
Vendors, as well as importers in specific, find themself in a complicated situation since they may
not realize whether solution applied in product is safeguarded by patent rights (Wang, Xu and
Feng, 2019). As here in case study given that XLG corporation that is cleaning
products corporation situated in eastern part, UK, it produces two major cleaning
agents, chemical name X and Y. XLG currently runs in a very competitive atmosphere;
Though, over years, they have sustained their market top position as a result of patent against
fama Q i.e. effective cleaning agent, implying that it could not be replicated by other competing
companies within industry. XLG has launched a number of stores throughout the UK and is also
selling their brands online, hosting a number of demonstration shows to attract buyers to their
brands. In the second half of year beginning in mar.2020, corona virus began to break out
and United Kingdom Government imposed a national lock-down to tackle the epidemic,
pressuring XLG to relocate all sales online.
Patent infringement relates to any incident involving the usage or use, use, bid, sale
and/or importing of patented item for benefit or professional reasons without the permission
of patent proprietor. Right to restrict imports of patented product is fundamental right given
to patent owner. Here in given case case major risk posed due to import of famaQ is patent
infringement which also can lead to many legal issues such as litigation and claims. Also here
notable aspect is lock-down due to corona virus outbreak. This affected economy of UK
adversely but here considerable change is that companies are now forced to sell their products
online (Webster and Lark, 2019).
As given in case study of XLG, due to lock-down, there is significant increase in the
selling prices as the standard selling price of per unit of chemical X has been increased form £35
per unit to £45 per unit while in case of chemical Y, selling price has been reached to £37 per
unit from £30 per unit. Major cause of this increment in selling price is increase in price of fama
Q that is company's superior cleaning element which is mixed in its products. Because of lock-
down as well as prohibitions and restrictions on international travellings, it become necessary for
company to import fama Q from air transport system. This has increased import cost
significantly as air transport is too expensive as compared to sea transport. Due to this increase in

transport costs, selling price of chemical X and Y has been increased. Fama Q's standard price
was £2.50 per unit that has been increased to £4.50 per unit but actually paid price by XLG is
£3.70 per unit. Here considerable impact is that company's overall profit margin would be
affected. Along with selling price, here a sudden increase has been reported in demand and
consumption of chemical X and Y. During second quarter, estimated total demand of chemical X
and Y i.e. 1190 units has been increased to 850 units and 750 respectively for chemical X and
chemical Y. This increment is favourable for company as this increased overall sell of its major
products. This is one of the major impact of lock-down. Reason behind such significant increase
is increased demand of cleaning products because now people have become more conscious
about cleanness and hygiene (Seaman, Riffe and Caswell, 2019).
Moreover, additional information provided in case study that if company makes single
unit of fama Q it will cost company to £3 per unit along with decreasing 15 days’ delivery time.
Here it is also provided that demand for chemical X and Y increased by 45 percent and
anticipated to be continue. Thus based on additional information and case study there are two
options available for company, as listed below:
Option 1- Import fama Q at increased import cost:
Under this option actual demand of chemical X and Y are: 850 and 750 respectively and
there is increase in cost of chemical X and Y due to import at revised actual price is £1.2 per unit
(£ 3.7 - £ 2.5). There for margin under this scenario would be, as follows:
If Imports: Chemical X Chemical Y
Budget
ed
Per
unit Actual
Varian
ce
Budget
ed
Per
unit
Varian
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
Increase in cost
due to import
of Fama Q - 1.2 1020 1020 - 1.2 900 900

Total 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
Option 2- Make fama Q in house:
Here in this scenario demand has been increased by 45% and delivery time reduced by 15
days while cost of making fama Q is 3 per unit. Based on such information following is analysis
of margin of products, as follows:
If making fama Q
Chemical X Chemical Y
Per
unit
Budget
ed
Per
unit
Varian
ce
Budget
ed
Per
unit
Varian
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 import of
Fama Q 0.5 1.2
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
Demand as per new scenario has been increased
by 45 percent

So, new demand for Chemical X and Y would
be:
Chemical X 595+ 595*45% 862.75
Chemical Y 595+ 595 * 45% 862.75
Through the evaluation of both the options it has been analysed that making in-house
fama Q would be more viable for company (Underdal, 2019). As the in case of both Chemical X
and Y, margin is higher if company making famaQ itself instead of making import. Also it has
been analysed in comparison with budgeted figures that option of making famaQ would be more
beneficial for corporation.
CONCLUSION
From aforementioned study this has been evaluated that Management accounting is
valuable for enterprises to handle their operations. This contains the important tactics,
frameworks, reporting approaches and other practices that ultimately assist decision-making
tasks within a business. It is not compulsory for business entities to follow management
accounting frameworks but in real life it is not practical for a business entity which operating in
competitive to environment and deal with different issues. Further it proposes several techniques
which not only support key decisions of managing personnel but also offer a assistive framework
for formulation of strategies.

REFERENCES
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