TUTORIAL 1- BUDGETING 1
Question 1 (a) Overhead costs for the 2010 budget:

Property cost
= $120,000 x 1·05 = $126,000

Central wages
= ($150,000 x 1·03) + $12,000
= $166,500

Stationery
= $25,000 x 0·6
= $15,000

(b) The road repair budget will be based on 2,200 metres of road repairs; it is common to include a contingency in case roads unexpectedly need repair (see part (c)).
The weather conditions could add an extra cost to the budget if poor or bad conditions exist.

The adjustment needed is based on an expected value calculation:
(0·7 x 0%) + (0·1 x 10%) + (0·2 x 25%) = 6%
Hence the budget (after allowing for a 5% inflation adjustment) will be:
2,200 x $15,000 x 1.06 x 1.05 = $36,729,000
This could be shown as:
(2,200 x 15,000 x 1·0 x 0·7) + (2,200 x 15,000 x 1·1 x 0·1) + (2,200 x 15,000 x 1·25 x 0·2) = $34,980,000
The $34,980,000 could then be adjusted for inflation at 5% to give $36,729,000 as above.

Question 3 (c) Beyond Budgeting (BB) is a responsibility culture in which managers are given goals that have been derived from benchmarks linked to competitors and world class performance. This culture requires an adaptive approach whereby authority is devolved to managers and the organisation’s structure will be a ‘network’ rather than ‘hierarchical’.

The principles of BB are:

* The organisation structure should have clear principles and boundaries. Everyone should have defined areas of responsibility.

* Managers should be given targets that are linked to the organisation’s strategy. Such targets should be based on key performance indicators and should be part of a balanced scorecard.

* Managers should be given a high degree of freedom to make decisions. The organisation chart should be ‘flat’.

* Responsibility for decisions that generate value should be placed with ‘front line teams’. These teams should be made responsible for managing relationships with business partners (customers, suppliers, etc).

* Information support systems should be transparent. For example, an activity based accounting system would enable reports to be generated to show the costs/revenues for activities which are the specific responsibility of identified managers.

It can be argued that in the modern dynamic business environment it is vital that management can react to changes in the market and allocate resources accordingly. BB will allow this to happen. The benefits that should accrue from the adoption of the principles of BB are faster response times, better innovation, lower costs and improved customer and supplier loyalty. All of these are of great importance in the modern dynamic business environment.

TUTORIAL 3
Question 1 (a)

Quarter | Actual volume of sales | Centred moving average | Seasonal percentage | | ’000 units | ’000 units | | 2010 | | | | Q3 | 900 | | | Q4 | 1,100 | | | | | | | 2011 | | | | Q1 | 1,200 | 1068·75 | 1·1228 | Q2 | 1,000 | 1112·50 | 0·8989 | Q3 | 1,050 | 1162·50 | 0·9032 | Q4 | 1,300 | 1206·25 | 1·0777 | | | | | 2012 | | | | Q1 | 1,400 | 1243·75 | 1·1256 | Q2 | 1,150 | 1287·50 | 0·8932 |

The average seasonal variations can now be calculated to see whether any adjustment to the percentages is required, since they must be 4·0 in total.
Since the averages total 4·0057, each one needs to be reduced by 0·0014

| Q1 | Q2 | Q3 | Q4 | | 2010 | | | 0·9080 | 1·0820 | | 2011 | 1·1228 | 0·8989 | 0·9032 | 1·0777 | | 2012 | 1·1256 | 0·8932 | | | | Total | 2·2484 | 1·7921 | 1·8112 | 2·1597 | | | ––––––– | –––––– | ––––––– | ––––––– | | Average | 1·1242 | 0·8960 | 0·9056 | 1·0799 | 4·0057 | | ––––––– | –––––– | ––––––– | ––––––– | | Rounded | 1·1228 | 0·8946 | 0·9042 | 1·0785 | 4·0001 |

The difference of 0·0001 is due to rounding and can be ignored.

The average trend of the centred moving averages is (1,287·5 – 1,068·75)/5 = 43,750 units.

Therefore forecast centred moving average for Q3 in 2012 = 1,287,500 + 43,750 = 1,331,250.

Adjusted for seasonal variation: 1,331,250 x 0·9042 = 1,203,716·25 units.

Forecast centred moving average for Q4 of 2012 = 1,287,500 + (2 x 43,750) = 1,375,000.

Adjusted for seasonal variation = 1,375,000 x 1·0785 = 1,482,937·5 units.

Note: Candidates could also worked back from the centred moving averages provided in the question for 2012 quarters 3 or 4 and they could also have used linear regression. (b) Likely impact on the staff and business

Staff

– Since the budgeting style has been an imposed one rather than a participative one, morale amongst staff is likely to be low, since they have not been involved in the process at all.

– Additionally, since sales targets appear to be unachievable and staff have not received performance related bonuses, staff are not motivated to try and achieve targets since they feel like they are impossible to achieve. Team spirit will be low and an atmosphere of ‘doing the bare minimum’ is likely to exist.

– Since budgets are imposed from the top down, the culture will not be one in which operational management generate ideas, as they will feel like they are not appreciated and that their views are not taken into account.

Business

– Since sales levels are overestimated, production volumes must also be too high. As well as this leading to high inventory costs because actual sales are then lower than expected, since the product is also perishable, waste levels have probably been high. These will be significant costs to the company.

– Also, when customers do receive their goods, it is likely that they will be close to their expiry date, since they will have been taken from inventory that has been held for some time. This will be frustrating for customers because products may then perish before the end customer gets to use them. Also, it is likely that a sauce that is two months old does not taste as good as a sauce that is only a few days old. Both of these factors may be causing damage to the company’s reputation.

– Too many staff are probably being employed in the business, bearing in mind that the staffing levels will be related to forecast production volumes. One can only assume that whilst initially, production volumes relate to the forecast, as it becomes apparent that sales are not as high as anticipated and inventory levels increase, production slows down. Staff are probably sitting idle for some of the time, which is demotivating for them and costly to the company.

Question 2 (a) In 2010 the four quarters will be numbers 5–8, consequently the trend figures for waste to be collected will be:

Quarter 1 (Q = 5): 2,000 + 25(5) = 2,125 tonnes

Quarter 2 (Q = 6): 2,000 + 25(6) = 2,150 tonnes

Quarter 3 (Q = 7): 2,000 + 25(7) = 2,175 tonnes

Quarter 4 (Q = 8): 2,000 + 25(8) = 2,200 tonnes

Seasonal adjustments are needed thus:

Quarter 1: 2,125 – 200 = 1,925

Quarter 2: 2,150 + 250 = 2,400

Quarter 3: 2,175 + 150 = 2,325

Quarter 4: 2,200 – 100 = 2,100

Total tonnage is 1,925 + 2,400 + 2,325 + 2,100 = 8,750 tonnes for the year.

(b) Regression analysis can be used to calculate the variable operating and fixed operating costs in 2009.

| Tonnes (X) | Total Cost (Y) | XY | X2 | | | $000’s | | | | 2,100 | 950 | 1,995,000 | 4,410,000 | | 2,500 | 1010 | 2,525,000 | 6,250,000 | | 2,400 | 1010 | 2,424,000 | 5,760,000 | | 2,300 | 990 | 2,277,000 | 5,290,000 | Sum | 9,300 | 3,960 | 9,221,000 | 21,710,000 |

Y = a +bX

Where ‘a’ is fixed operating cost and ‘b’ is variable operating cost in this context.

Using the formula given:

b = (4 x 9,221,000 – 9,300 x 3,960)/(4 x 21,710,000 – (9,300)2)

b = 0·16 or $160 per tonne as the original data is in $000’s. This was the variable operating cost per tonne for 2009.

a = (3,960/4) – (0·16 x 9,300/4)

a = 618 or $618,000 as the original data is in $000’s. This was the fixed operating cost in 2009.

Allowing for inflation:

The variable operating cost in 2010 will be $160 x 1·05 = $168 per tonne

The fixed operating cost in 2010 will be $618,000 x 1·05 = $648,900

(c) Advantages of an incremental budgeting approach:

* Local government organisations are often complex and incremental budgeting will be seen as a simple approach to a budget that will take little effort.

– Budget processes can be long ones, however incremental approaches do tend to be quicker than most. Complex local government organisations can suffer from very long budget processes and incremental budgeting can alleviate this a little.

Disadvantages of incremental budgeting:

– Public bodies, such as local governments, will be encouraged to use up all of this year’s budget in order to ensure that next year’s budget will be as high as possible to give themselves the flexibility they need to do whatever is needed. The public services required can be unpredictable and so local government organisations prefer to be able to be flexible.

– Overspends made in this year will be budgeted for again next year, this is hardly giving taxpayers value for money.

Question 3 (a) The average cost of the first 128 chairs is as follows: | | | | $ | Frame and massage mechanism | | 51·00 | Leather | 2 metres x $10/mtr x 100/80 | 25·00 | Labour | (W1) | 20·95 | | | –––––– | Total | | 96·95 | | | –––––– |

Target selling price is $120.

Target cost of the chair is therefore $120 x 80% = $96

The cost gap is $96·95 – $96·00 = $0·95 per chair

(W1)

The cost of the labour can be calculated using learning curve principles. The formula can be used or a tabular approach would also give the average cost of 128 chairs. Both methods are acceptable and shown here.

Tabulation: | | | | Cumulative output | Average time per | Total time (hrs) | Average cost per chair at $15 per hour | (units) | unit (hrs) | | | 1 | 2 | | | 2 | 1·9 | | | 4 | 1·805 | | | 8 | 1·71475 | | | 16 | 1·6290125 | | | 32 | 1·54756188 | | | 64 | 1·47018378 | | | 128 | 1·39667459 | 178·77 | 20·95 |

Formula:

Y = axb
Y = 2 x 128–0·074000581

Y = 1·396674592

The average cost per chair is 1·396674592 x $15 = $20·95

(b) The cost of the 128th chair will be:

| | $ | Frame and massage mechanism | | 51·00 | Leather | 2 metres x $10/mtr x 100/80 | 25·00 | Labour | 1·29 hours x $15 per hour (W2) | 19·35 | | | –––––– | Total | | 95·35 | | | –––––– |

Against a target cost of $96 the production manager is correct in his assertion that the required return is now being achieved.

(W2)

Using the formula, we need to calculate the cost of the first 127 chairs and deduct that cost from the cost of the first 128 chairs.

Y = axb
Y = 2 x 127–0·074000581

Y = 1·39748546

Total time is 127 x 1·39748546 = 177·48 hours

Time for the 128th chair is 178·77 – 177·48 = 1·29 hours

TUTORIAL 4&5
Question 1 (a) Sales price operational variance = (actual price – market price) x actual quantity Commodity 3 = ($40·40 – $39·10) x 25,600 = $33,280F

Sales price planning variance
= (standard price – market price) x actual quantity Com. 3
= ($41·60 – $39·10) x 25,600
= $(64,000)A

An alternative approach to the variance calculations for Commodity 3 would be as follows:

Sales price operational variance

| Commodity 3 | Should now | $39·10 | Did | $40·40 | | ––––––– | Difference | $1·30F | Actual sales quantity | 25,600 | Variance | $33,280F | Sales price planning variance | | | Commodity 3 | Should now | $39·10 | Should | $41·60 | | ––––––– | Difference | $2·50A | Actual sales quantity | 25,600 | Variance | $64,000A | | | (b) Sales mix variance
= (Actual sales quantity in actual mix at standard margin) – (actual sales quantity in standard mix at standard margin)
= $768,640 (w.1 & 2) – $782,006 (w.3)
= $13,366 adverse.

Working 1: Standard margins per unit:

Budgeted machine hours = (30,000 x 0·2) + (28,000 x 0·6) + (26,000 x 0·8) = 43,600.

Overhead absorption rate = $174,400/43,600 = $4 per hour.

Product | | Commodity 1 | Commodity 2 | Commodity 3 | | | $ | $ | $ | Standard selling price | | 30 | 35 | 41·60 | Variable production costs | | (18) | (28·40) | (26·40) | Fixed production overheads | (0·8) | (2·4) | (3·2) | | | –––––– | ––––– | ––––– | Standard profit margin | | 11·20 | 4·20 | 12 | | | –––––– | ––––– | ––––– | Working 2: Actual sales quantity in actual mix at standard profit margin: | Product | | Actual quantity in Actual Mix | Standard profit | $ | Commodity 1 | | 29,800 | $11·20 | 333,760 | Commodity 2 | | 30,400 | $4·20 | 127,680 | Commodity 3 | | 25,600 | $12 | 307,200 | | | ––––––– | | –––––––– | | | 85,800 | | 768,640 | | | ––––––– | | –––––––– | Working 3 Actual sales quantity in standard mix at standard profit margin: | Product | Actual quantity in standard mix | Standard profit | $ | Commodity 1 | | 85,800 x 30/84 = 30,643 | $11·20 | 343,202 | Commodity 2 | | 85,800 x 28/84 = 28,600 | $4·20 | 120,120 | Commodity 3 | | 85,800 x 26/84 = 26,557 | $12 | 318,684 | | | ––––––– | | –––––––– | | | 85,800 | | 782,006 | | | ––––––– | | –––––––– |

The sales quantity variance
= (actual sales quantity in standard mix at standard margin) – (budgeted sales quantity in standard mix at standard profit margin)
= $782,006 (w.3 above) – $765,600 (w.4)
= $16,406 favourable.

Working 4: Budgeted sales quantity in standard mix at standard profit margin:

Product | Quantity | Standard profit | $ | Commodity 1 | 30,000 | $11·20 | 336,000 | Commodity 2 | 28,000 | $4·20 | 117,600 | Commodity 3 | 26,000 | $12 | 312,000 | | ––––––– | | –––––––– | | 84,000 | | 765,600 | | ––––––– | | –––––––– | | | | |

(c) The calculations above have shown that, as regards the sales price, there is a $23,360 favourable operational variance and a $54,680 adverse planning variance. In total, these net off to a sales price variance of $31,320 adverse. The sales manager can only be responsible for a variance to the extent that he controls it. Since the standard selling prices are set by a consultant, rather than the sales manager, the sales manager can only be held responsible for the operational variance. Given that this was a favourable variance of $23,360, it appears that he has performed well, achieving sales prices which, on average, were higher than the market prices at the time. The consultant’s predictions, however, were rather inaccurate, and it is these that have caused an adverse variance to occur overall in relation to sales price.

As regards sales volumes, the mix variance is $13,366 adverse and the quantity variance is $16,406 favourable, meaning that the total volume variance is $3,040 favourable. This is because total sales volumes were higher than expected, although it is apparent that the increased sales related to the lower margin Commodity 2, with sales of Commodity 1 and Commodity 3 actually being lower than budget.

The total variance relating to sales is $28,280 adverse. This looks poor but, as identified above, it is due to the inaccuracy of the sales price forecasts made by the consultant. We know that Block Co is facing tough market conditions because of the economic recession and therefore it is not that surprising that market prices were actually a bit lower than originally anticipated. This could be due to the recession hitting even harder in this quarter than in previous ones.

Question 2 Truffle Co

(a) Basic variances

Standard cost of labour per hour = $6/0·5 = $12 per hour.

Labour rate variance
= (actual hours paid x actual rate) – (actual hours paid x std rate) Actual hours paid x std rate
= $136,800/·95 = $144,000.
Therefore rate variance = $144,000 – $136,800 = $7,200 F

Labour efficiency variance = (actual production in std hours – actual hours worked) x std rate [(20,500 x 0·5) – 12,000] x $12 = $21,000 A.

(b) Planning and operational variances

Labour rate planning variance

(Revised rate – std rate) x actual hours paid = [$12 – ($12 x 0·95)] x 12,000 = $7,200 F.

Labour rate operational variance

There is no labour rate operational variance.

(Revised rate – actual rate) x actual hours paid = $11·40 – $11·40 x 12,000 = 0

Labour efficiency planning variance

(Standard hours for actual production – revised hours for actual production) x std rate
= [10,250 – (20,500 x 0·5 x 1·2)] x $12 = $24,600 A.

Labour efficiency operational variance

(Revised hours for actual production – actual hours for actual production) x std rate
= (12,300 – 12,000) x $12 = $3,600 F.

(c) Discussion

When looking at the total variances alone, it looks like the production manager has been extremely poor at controlling his staff’s efficiency, since the labour efficiency variance is $21,000 adverse. It also looks, at a glance, like he has managed to secure labour at a lower rate.

In order to assess the production manager’s performance fairly, however, only the operational variances should be taken into account. This is because planning variances reflect differences that arise because of factors that are outside the control of the production manager. The operational variance for the labour rate was $0, which means that the labour force were paid exactly what was agreed at the end of October: their reduced rate of $11·40 per hour. The manager clearly did not have to pay anyone for overtime, for example, which would have been expected to push this rate up. The rate reduction was secured by the company and was not within the control of the production manager, so he cannot take credit for the favourable rate planning variance of $7,200. The company is the source of this improvement.

As regards labour efficiency, the planning and operational variances give us more information about the total efficiency variance of $21,000A. When this is broken down into its two parts, it becomes clear that the operational variance, for which the manager does have control, is actually $3,600 favourable. This is because, when the recipe is changed as it has been in November, the chocolates usually take 20% longer to make in the first month whilst the workers are getting used to handling the new ingredient mix. When this is taken into account, it can therefore be seen that workers took less than the 20% extra time that they were expected to take, hence the positive operational variance. The planning variance, on the other hand, is $24,600 adverse. This is because the standard labour time per batch was not updated in November to reflect the fact that it would take longer to produce the truffles. The manager cannot be held responsible for this.

Overall, then, the manager has performed well, given the change in the recipe.

Question 3
(a)
(i) | Usage variance | | | | | | | | Std usage for actual output | Actual usage | Variance | Std cost / kg | Variance | | | kgs | kgs | kgs | $ | $ | | Honey | 2,020 | 2,200 | (180) | 20 | (3,600) | | Sugar | 1,515 | 1,400 | 115 | 30 | 3,450 | | Syrup | 1,010 | 1,050 | (40) | 25 | (1,000) | | | | | | | –––––– | | | | | | | (1,150) A | | | | | | | –––––– | (ii) | Mix variance | | | | | | | | Actual qnty std mix | Actual qnty actual mix | Variance | Std cost /kg | Variance | | | kgs | kgs | kgs | $ | $ | | Honey | 2,066·67 | 2,200 | (133·33) | 20 | (2,666·60) | | Sugar | 1,550 | 1,400 | 150 | 30 | 4,500 | | Syrup | 1,033·33 | 1,050 | (16·67) | 25 | (416·75) | | | | | | | ––––––––– | | | | | | | 1,416·65 F | | | | | | | ––––––––– | (iii) | Yield variance | | | | | | | | Std quantity std mix | Actual qnty std mix | Variance | Std cost / kg | Variance | | | kgs | kgs | kgs | $ | $ | | Honey | 2,020 | 2,066·67 | (46·67) | 20 | (933·40) | | Sugar | 1,515 | 1,550 | (35) | 30 | (1,050) | | Syrup | 1,010 | 1,033·33 | (23·33) | 25 | (583·25) | | | | | | | (2,566.65)A |

The method used above is a more simple method for calculating the mix and yield variances than the one shown below. However, in the method shown below, the individual variances for each material are also meaningful, whereas they are not in the method shown above. Since the question only asks for the total variances, students will be given credit for either method.

(ii) Mix variance

| Actual qntyStandard Mix | Actual qntyActual Mix | Variance | Budgeted WAC/ kg | Std cost / kg | Difference | Variance | | kgs | kgs | kgs | | $ | | $ | Honey | 2,066·67 | 2,200 | (133·33) | 24·44 | 20 | (4·44) | 592·59 | Sugar | 1,550 | 1,400 | 150 | 24·44 | 30 | 5·56 | 833·33 | Syrup | 1,033·33 | 1,050 | (16·67) | 24·44 | 25 | 0·56 | (9·26) | | | | | | | | | –––––––– | | | | | | | | | 1,416·66 F | | | | | | | | | –––––––– | (iii) Yield variance | | | | | | | | | Std usage for Actual Output | Actual qnty Actual Mix | Variance | | Variance | | | | kgs | kgs | kgs | | $ | | | Honey | 2,020 | 2,200 | (180) | 24·44 | (4,400·00) | | | Sugar | 1,515 | 1,400 | 115 | 24·44 | 2,811·11 | | | Syrup | 1,010 | 1,050 | (40) | 24·44 | (977·78) | | | | | | | | | ––––––––– | | | | | | | | | (2,566·67) A | | | | | | | | | ––––––––– | | | Budgeted weighted average cost | | | | | | | Honey | 2,066·67 | 20 | | 41,333·4 | | | | | Sugar | 1,550 | 30 | | 46,500 | | | | | Syrup | 1,033·33 | 25 | | 25,833·25 | | | | | | | | ––––––––––– | | | | | | | 4,650 | 113,666·65 | 24·44 | | | | | | | ––––––––––– | | | | |

WAC = $113,666·65/4,650 kg = $24·44

Question 4 (a) (i) Sales price variance and sales volume variance | Sales price variance = (actual price – standard price) x actual volume | | | | Actual Price | Standard Price | Difference | Actual Volume | Sales Price Variance | | | $ | $ | $ | | $ | | Plasma TVs | 330 | 350 | –20 | 750 | 15,000 | A | LCD TVs | 290 | 300 | –10 | 650 | 6,500 | A | | | | | | ––––––– | | | | | | | 21,500 | A | | | | | | ––––––– | | Sales volume contribution variance = (actual sales volume – budgeted sales volume) x standard margin | | Actual Sales Volume | Budgeted Sales Volume | Difference | Standard Margin | Sales Volume | | | | | | $ | $ | | Plasma TVs | 750 | 590 | 160 | 190 | 30,400 | F | LCD TVs | 650 | 590 | 60 | 180 | 10,800 | F | | –––––– | –––––– | | | ––––––– | | | 1,400 | 1,180 | | | 41,200 | F | | –––––– | –––––– | | | ––––––– | |

(ii) Material price planning and purchasing operational variances

Material planning variance = (original target price – general market price at time of purchase) x quantity purchased ($60 – $85) x 1,400 = $35,000 A.
Material price operational variance = (general market price at time of purchase – actual price paid) x quantity purchased. ($85 – $80) x 1,400 = $7,000 F.

(iii) Labour rate and labour efficiency variances

Labour rate variance = (standard labour rate per hour – actual labour rate per hour) x actual hours worked.

Actual hours worked by temporary workers:

Total hours needed if staff were fully efficient = (750 x 2) + (650 x 1·5) = 2,475. Permanent staff provide 2,200 hours therefore excess = 2,475 – 2,200 = 275. However, temporary workers take twice as long, therefore hours worked = 275 x 2 = 550

Labour rate variance relates solely to temporary workers, therefore ignore permanent staff in the calculation. Labour rate variance = ($14 – $18) x 550 = $2,200 A.
Labour efficiency variance = (standard labour hours for actual production – actual labour hours worked) x standard rate. (275 – 550) x $14 = $3,850 A.

(b) Explanation of planning and operational variances

Before the material price planning and operational variances were calculated, the only information available as regards material purchasing was that there was an adverse material price variance of $28,000. The purchasing department will be assessed on the basis of this variance, yet, on its own, it is not a reliable indicator of the purchasing department’s efficiency. The reason it is not a reliable indicator is because market conditions can change, leading to an increase in price, and this change in market conditions is not within the control of the purchasing department.

By analysing the materials price variance further and breaking it down into its two components – planning and operational – the variance actually becomes a more useful assessment tool. The planning variance represents the uncontrollable element and the operational variance represents the controllable element.

The planning variance is a really useful for providing feedback on just how skilled management are in estimating future prices. This can be very easy in some businesses and very difficult in others.

The operational variance is more meaningful in that it measures the purchasing department’s efficiency given the market conditions that prevailed at the time. It therefore ignores factors that the purchasing department cannot control, which in turn, stops staff from becoming demotivated.

Question 5
Crumbly Cakes

(a) Production manager
Assessing the performance of the two managers is difficult in this situation. In a traditional sense the production manager has seriously over spent in March following the move to organic ingredients. He has a net adverse variance against his department of $2,300 in one month. No adjustment to the standards has been made to allow for the change to organic.

The manager has not only bought organically he has also changed the mix, increasing the input proportion of the more expensive ingredients. This may have contributed to the increased sales of cakes.

However, the decision to go organic has seen the sales of the business improve. We are told that the taste of the cakes should be better and that customers could perceive a health benefit. However, the production manager is allocated none of the favourable sales variances that result. If we assume that the improved sales are entirely as a result of the production manager’s decision to change the ingredients then the overall net favourable variance is $7,700.

The production manager did appear to be operating within the original standard in February, indicating a well performing department. Indeed he will have earned a small bonus in that month.

Sales manager
A change to organic idea would need to be ‘sold’ to customers. It would presumably require a change of marketing and proper communication to customers. The sales manager would probably feel he has done a good job in March. It is debatable, however, whether he is entirely responsible for all of the favourable variances. The move to organic certainly helped the sales manager as in February he seems to have failed to meet his targets.

Bonus scheme
The problem here is that the variances have to be allocated to one individual. The good sales variances have been allocated to the sales manager when in truth the production manager’s decision to go organic appears to have been a good one and the driver of the business success. Responsibility accounting systems struggle to cope with ‘joint’ success stories, refuting in general a collective responsibility.

Under the current standards the production manager has seemingly no chance to make a bonus. The main problems appear to be the out-of-date standards and the fact that all sales variances are allocated to the sales manager, despite the root cause of the improved performance being at least in part the production manager’s decision to go organic. The system does not appear fair.
General comments
It would appear that some sharing of the total variances is appropriate. This would be an inexact science and some negotiation would be needed.
One problem seems to be that the original standards were not changed following the decision to go organic. In this sense the variances reported are not really ‘fair’. Standards should reflect achievable current targets and this is not the case here.

(b) Material price variances | | | | | Ingredient | Act price/kg | Std price/kg | Actual Qty | (AP – SP) x AQ | Adv/Fav | | | | kg | | MPV | | Flour | 0·13 | 0·12 | 5,700 | | 57 | Adv | Eggs | 0·85 | 0·70 | 6,600 | | 990 | Adv | Butter | 1·80 | 1·70 | 6,600 | | 660 | Adv | Sugar | 0·60 | 0·50 | 4,578 | | 458 | Adv | | | | | | –––––– | | Total | | | | | 2,165 | Adv | | | | | | –––––– | | Material mix variance | | | | | Ingredient | Act mix | Std mix | Std price | | Variance | Adv/Fav | Flour | 5,700 | 5,870 | 0·12 | | –20 | | Eggs | 6,600 | 5,870 | 0·70 | | 511 | | Butter | 6,600 | 5,870 | 1·70 | | 1,241 | | Sugar | 4,578 | 5,870 | 0·50 | | –646 | | | ––––––– | ––––––– | | | –––––– | | Totals | 23,478 | 23,478 | | | 1,086 | Adv | | ––––––– | ––––––– | | | –––––– | | Material yield variance | | | | | Actual yield | | | 60,000 cakes | | | Standard yield (23,478/0·4) | | 58,695 cakes | | | Difference | | | 1,305 cakes | | | Standard cost of a cake (W1) | | $0·302 | | | | Yield variance (1,305 * 0·302) | | 394 Fav | | | Sales price variance | | | | | | | Act price | Std Price | Act volume | (AP – SP)*Act Vol Variance | Adv/Fav | Cake | 0·99 | 0·85 | 60,000 | | 8,400 | Fav | Sales volume contribution variance | | | | Actual volume | | | 60,000 cakes | | | Budget volume | | | 50,000 cakes | | | Standard contribution | | 0·35 | | | | Variance (60,000 – 50,000) * 0·35 = | $3,500 Fav | | | W1 | | | | | | | Standard cost of a cake | | | | | Ingredients | | Kg | $ | | Cost | | Flour | | 0·10 | $0·12 per kg | 0·012 | | Eggs | | 0·10 | $0·70 per kg | 0·070 | | Butter | | 0·10 | $1·70 per kg | 0·170 | | Sugar | | 0·10 | $0·50 per kg | 0·050 | | Total input | | 0·40 | | | 0·302 | | Normal loss (10%) | (0·04) | | | | | | | ––––– | | | | | Standard weight/cost of a cake | 0·36 | | | 0·302 | |

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