...Katy EH Manufacturing Company | ASSIGNMENT | Evaluation of Business Plans, Budgeting and Variance Analysis | | Algernon Jones | 05-Dec-15 | Katy EH Manufacturing Company INTODUCTION: This study was conducted to evaluate various business plans of Katy EH Manufacturing Company and their impact on profit before tax, preparation of budget as per selected option and investigation of variances of operating budget of year 2016. Answer Part (a): To decide whether product line Grill A be dropped or not by Katy EH we will calculate contribution margin from Grill A. If the contribution margin becomes zero then we will suggest dropping the said product line otherwise not depending on other non-financial factors. Calculation of Contribution Margin from Line Grill A: Revenue | 80,000 x 150 = | $ 12,000,000 | | | | Less: Relevant Cost: | | | Direct Material | 80,000 x 17 = | 1,360,000 | Direct Labour | 80,000 x 21 = | 1,680,000 | Supplies | 80,000 x 7 = | 560,000 | Indirect Labour | 80,000 x 10 x 50% = | 400,000 | Energy | 80,000 x 12 x 50% = | 160,000 | | | (4,160,000) | Contribution Margin | | 7,840,000 | Impact of dropping Grill A on Profit Before Tax: Budgeted Income Before Tax For The Year 2016 | $ 6,680,000 | Reduction in Profit Before Tax if Grill A is dropped | (7,840,000) | Budgeted...
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... 38180 230 5287 Revenue of revised budget = 23*10*47 = $108100 Total bonus = 1000 + ((5287 – 230)/10) * 1 = $1504.8 b) Flexible budget variance = Actual result – Flexible budget amount = Actual Units * Actual CM/unit – Actual Units * Budgeted CM/unit = 27*470*4.75 – 27*470*5 = $3173U Static budget variance = Actual results – Static budget amount = Actual Units* Actual CM/unit – Budgeted Units * Budgeted CM/unit = 27*470*4.75 – 23*470*5 = $6227F Sales volume variance = (Actual sales quantity in units– Static budget sales quantity in units) *Budgeted CM/unit = (27*470 – 23*470) * 5 = $9400F *Actual CM/unit = actual revenue/vehicle – actual variable expenses/vehicle = 9.50 – 9.50/2 = $4.75 Budgeted CM/unit = budgeted revenue/vehicle – budgeted variable expenses/vehicle = 10 – 10/2 = $5 All variance based on revised budget In conclusion, the location properly was managed in the last quarter, because the actual is better than the budget. The work efficiency is increased, although the average revenue per vehicle reduced. For the three variance, the flexible budget...
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...USE AT YOUR OWN RISK MANAC – II VARIANCE ANALYSIS Variances are to be calculated for each department separately. The standard/Budgeted values means the Budgeted Values for actual Output. This Budget is called Flexible Budget ( How to Prepare?) Variances are always the difference between values actually used and Budgeted values for actual output. All variances are in Dollars/Rupees. Any Variance = Some Quantity * Some Price – Another quantity*another price. For any Case, follow the following steps: 1) identify causes for the variance 2) Hold some Department to be responsible for it. 3) Suggest remedial, if possible 2 Golden Rules: Cost Control is always done on Actual Output Inefficiency of one department should never be attributed/overlapped to another department. VARIANCE OUTPUT INPUT SALES Variance MATERIAL Variance LABOUR Variance OVERHEAD Variance USE AT YOUR OWN RISK 1 USE AT YOUR OWN RISK MATERIAL VARIANCE: AQ – ACTUAL Quantity SQ – Standard Quantity AP – ACTUAL Price SP – Standard Price SM – Standard Mix AM – ACTUAL Mix MATERIAL VARIANCE PRICE VARIANCE AQ@AM*(AP – SP) QUANTITY/USAGE VARIANCE SP*(AQ@AM-SQ@SM) MIX VARIANCE SP*(AQ@AM-AQ@SM) YIELD VARIANCE SP*(AQ@SM-SQ@SM) AO AO AO AO AQ AM AP AQ AM SP Price Variance AQ SM SP Mix Variance SQ SM SP Yield Variance Yield + Mix = Usage/Quantity Variance USE AT YOUR OWN RISK 2 USE AT YOUR OWN RISK LABOUR VARIANCE: AH – ACTUAL Hours SH – STANDARD Hours AM...
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...b. Static budget variance=$6228F Flexible budget variance=$3172U Sales volume variance=$9400F proof: $6228F=$3172U+9400F In my opinion, flexible budget variance and sales volume variance are both controllable as they can be managed by the manager. For example, sales volume variance can be improved if the manager improves the work efficiency and flexible budget variance can be improved if he controls the sales price and variable cost. Jatin, do we need to calculate fixed expense variance? I can't find this calculation in the module. Also, just a small suggestion, you may put "F"(positive) or "U(negative) beside every variance, such as those in the table in a and three variances in b. We can say that overall, location is properly managed by manager except : 1) Average revenue per vehicle reduced to 9.5 from 10 per vehicle. Due to this we made a loss of 3173 in margin 2) Fixed expense was not properly incurred. Expense increased by 1180. Note: As we don't have bifurcation of fixed expense, we believe that all the expense incurred in this category would be controllable. Considering following we can say that, location is properly managed. 1) Location profit increase by 5048 compare to 230 (Un controllable portion removed from budget and revised budget considered) 2) Work efficiency is increased. Average vehicle washed per hour was targeted 23/hour which reach to 27/hour. ________________________________________ 1 Return on assets (ROA) is the measure...
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...manager and the main headquarters was located in Paris. Jacques believed decentralizing the decision making as much as possible. Each region had its own manufacturing, marketing, distribution and sales organization. The central office took care of accounting, developing of new products, and sharing of learning experiences across the regions. Each year Jacques met with the regional managers to discuss a profit plan for each region. The profit plans laid out regional goals for the upcoming year and were used as a tool to monitor performance. During the summer months, a profit statement every two weeks was generated and sent to Jacques in order to detect any major problems. The France region is run by Jean Pinoux and had performed exceptionally well in 2009 with profits above budget and sales increasing by 20% from the previous year. Jean had stumbled across a new source of revenue in which he helped deliver packaged food for regional producers using the company’s refrigerated trucks. The incremental cost to provide the service was very low and was seen by Jean as a simple way to increase revenue. Jacques was surprised by Jean’s new initiative, but acknowledged the profit potential in the distribution business. Pierre Giraux is the manager of the Italian region. The 2009 sales goals were met and Pierre had expanded business into most of the western Italian coast, but suffered...
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...Operating Budget Christine Mosqueda ACC206: Principles of Accounting II Instructor LaKeitha Givens Date Submitted Operating Budget Within a firm, there are many approaches a manger must organize to get the required attention from the employees. The most important and necessary thing a manager must do is to be able to construct a budget. In an operating budget, there are many different elements that are required to maintain the integrity of the budget for the company. Managers must include an operating budget that keeps the company disciplined and organized. As the manager develops the operating budget, he/she must also decipher what the variance of the budget is. An operating budget is as important as a heart is to a human, if the operating budget is designed correctly, then the company with the budget could flourish into a successful business. In the process of developing the operating budget, the first step is to start with the construction of the budget. To start constructing a budget, the company needs to form a plan. In the process of forming a plan, management would get together to then choose a direction that they would like the company to go. After forming a plan, the company also needs to think about the development of the strategy. The development of the strategy is extremely important because as in any strategy if you move too early or too late, the whole strategic plan could be ruined. The strategy a company takes will determine how successful...
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...WE PROVIDE NMIMS – NARSEE MONJEE - PGDSCM, PGDMM, PGDFM, DGM, DSCM, DMM, DITM, DHRM, DFM, DBM, DBFM, ASSIGNMENT ANSWERS, ASSIGNMENT SOLUTIONS aravind.banakar@gmail.com http://www.mbacasestudyanswers.com ARAVIND - 09901366442 – 09902787224 SALES MANAGEMENT 1. Suppose you are Sales Manager (priority banking) in a Bank which deals with key account holders explain how you will? a. Recruit sales force b. Prepare the Job Description and Specification c. Design training program for them. (Marks 15) 2. Suppose you are Sales Manager in life insurance Company, managing team of fifteen sales executives. How you will use sales force automation to improve efficiency and effectiveness of sales operation? (Marks 15) Corporate Finance 1. Suppose, a prospective client who wants to invest certain amount of money comes to you but does not know anything about ‘Time Value of Money’. So, please explain to the person the concept of ‘Time Value of Money’ in detail. 2. A limited company is considering investing a project requiring a capital outlay of Rs. 2, 00,000. Forecast for annual income after depreciation but before tax is as follows : Year | Rs. | 1 | 1,00,000 | 2 | 1,00,000 | 3 | 80,000 | 4 | 80,000 | 5 | 40,000 | Depreciation may be taken as 20% on original cost taxation at 50% of net income. You are required to evaluate the project according to each of the following methods: a) Pay back method b) Rate of return on original investment method ...
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...1. Discuss budgetary areas that raise concern in the budget planning. The Sales during 2008 were 3,400 units and for 2009 a projected sale of 3,510 has been made this represents a 3.2% increase in sales while the sales for 2008 over 2009 reduced by 15%. Managements anticipation of moderate sales increase will need to come true for the company to meet the targeted sales of 3,510 units considering the current environment and expected trends for the next 3 years. The Company has a gross margin of 27% however the operating margin is only 1.535% which is quite low considering that any costs increase even marginal or drop in sales or sales price could cause a the company to go form a relatively small profit to a loss. The company would have to have a relook at its operating expenses and find ways to reduce and find cost savings in that class. Executive compensation is quite high at around 22% of selling and general expenses and much more then the 170,000 of all other administrative salaries. Executives may need to take a cut in compensation considering the underlying environment and load on the company. The returns on equity and assets are also significantly low for the firm in the current year and these projections provided will most likely cause the stock price of the company to be under downward pressure. The company has not considered any dividend payouts making the company not very attractive to dividend seeking investors while growth is not strong so growth investors...
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...Learning Team D, Mauricio Cruz, Nichole Guerra, Srinivas Sangani, and Sterling Mason is to discuss and write a paper on how budgeting and variance analysis helps managers to make decisions. Budgeting and Variance Analysis The major responsibility of a manager is to plan for future. An organization to be successful, it has to make short-term and long-term plans. These plans sets the organizations objectives and ways to accomplish the goals of the organization. A budget is a formal written plan at an organizational level for the outgoing expenses and incoming revenues for a specific period. The purpose of the budget is to ensure that the funds are available to accomplish the objectives of the organization according to plan, justify the use of funds, and help plan future funding accurately. Budgeting plays a great deal in the helping with management decisions. Knowing and understanding the budget can help ease the decision making. For example, in the retail industry every store has a certain budget that strive to meet. Budgets are created from previous year’s sales and can be adjusted for various reasons. The budget numbers allocate a specific amount of labor. When these budgets are not being met, management is required to cut back on labor. Understanding how to read and forecast budgets can help the decision making process easier. Running sales to labor every day helps the management staff in understanding and budgeting correctly. For any company a budget can provide a plan...
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...Competition Bike. From year 2006 to 2008, Competition Bike experienced a 13.3% increase in sales. In year 9, sales are projected to increase to 3510 units to give sales revenue of $5,247,450. This is a bold increase after 3400 units sold in 2008 and 4000 sold in 2007. I do not think the sales will be as robust with the economy rebounding. Sales projections should be 3425 with net sales at $5,120,375. Since the Competition Bike Company projected overly optimistic sales, there are several areas in the budget that will be affected. The areas affected are Sales Commission, Transportation Out, Advertising, Research and Development, Raw Materials, and Labor. * Sales Commission: With commissions budgeted for 3% of sales revenue, this amount is budgeted too high since the budgeted net sales is inflated * Advertising: This expense line will be incorrect due to it being based on 2% of the Gross Margin. The Gross Margin will be off due to inflated projections. * Raw Materials: Due to inflated sales projections, the raw materials cost should be lowered to reflect a realistic net sales projection. * Labor: Labor cost should be reduced due to fewer hours being used with my projection of fewer units being sold as compared to the 2009 projections. It takes 15 hours/unit, so with fewer than projected sales, this should be reduced. * Transportation Out: Since the projected sales is too high, transportation cost should be reduced with $30/unit allocated. * Research...
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...budgetary items that raise concern in the budget planning A master budget is the central planning tool for a company; it should include the following areas: * Direct Labor Budget * Direct/Raw Materials Budget * Finished Goods Budget * Manufacturing Overhead Budget * Production Budget * Sales Budget * Selling and Administrative Expense Budget Competition Bikes’ budget is subdivided into smaller budgets. The objective of the master budget is to provide a forecast based on sales projections for the next budget period (quarter, semester or a year). The master budget should meet the company goals. After analyzing the master budget for Competition Bikes we found a few areas of concern: The first one was a disregard of previous years’ trends. When year eight was analyzed we discovered changes in the economy which negatively impacted the company because of a decrease in sponsorships affecting the company’s sales. Competition Bikes should have taken a more conservative approach and set the budget at the same level of sales of year eight or have a more conservative increase on sales projections at no more than 1.5%, to reduce the risk of creating over sales and as a consequence to trigger a ripple effect of over-budgeting the operational and production budgets. Another area of concern is that utilities expenses were double recorded, once under “utilities” and another under “utilities and services”. In the same area of utilities we identified another mistake...
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...different administrative units, facilitates decision-making, and provides a framework for monitoring and for performance evaluation. All managers are responsible for preparing a budget. Since specific departments play important roles in improving various components of the balance sheet and the income statement, it is critical that they prepare their budgets in a responsible way. Once budgets are in place it is necessary to analyse the difference between the actual and budgeted costs (variance). A variance analysis involves the decomposition of the variance into the individual factors that caused the variance. Managers need to be able to understand how to break down and analysis the variances; this helps them determine the proper corrective action. PROBLEM The Midwest Ice Cream Company is doing many things wrong, and the mistakes they are making are being covered up by a poorly planned budget. ANALYSIS The overall variance at Midwest Ice Cream is $71,700F . This is considered a good variance because it means...
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...profits above the actual budget can be attributed to 20% increase in sales in 2009. Although Jean’s profits were above the actual budget, French Division’s earnings were much lower than what it could have been, had they budgeted for the actual volume of sales that they ended up selling. We can partly attribute this decrease in earnings to the fact that the French division had to sell a certain volume of its products to the Spanish region at a lower contribution margin. Also, Jean had invested a lot of time in managing the expansion into west coast of France, cultivating relationships with vendors and suppliers and working on distribution channels. We agree with Jacques that they would have to wait for some years to receive the full benefits from this investment. But had Jean incorporated this wait in his budgeted profit plan, he would have been able to achieve a realistic sales objective. Besides, Jean should focus more on sales drop in traditional regions of French Market and maintaining relationships with distributors in the east coast as it was hurting their core business. Focusing on alternate sources of revenues can take a back seat and time saved should be spent on core business. Spanish Division Units ('000) Profit Plan (Master Budget) Profit before Interest and Taxes = 5288 Flexible Budget Profit before Interest and Taxes = 5065 But Actual Profit earned = 4241 Profit Variance comparing to Master Budget (Profit Plan) = (1047) Unfavorable....
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...business is performing can tell management or investors if the company is living up to their expectations. If it isn't, the company can have the opportunity to move in a different direction for improvement. In reviewing the budget and proforma statement for Competition Bikes, there are a few areas of concern which are discussed below. In 2006, the company sold 3000 units and had a nice increase in sales in 2007 to 4000 units. In year 8 however, there was a decrease in sales down to 3400 units. The company is forecasting sales in 2009 to be 3510 units and continuing increasing the following two years as well. Due to the stated economic decline and cut back on sponsors that pay for bikes for professional riders, the company is anticipating an increase in sales but do not say what this increase is based on to be sure their forecast is accurate. I would need more hard facts as to what this increase is based on before I am comfortable with the numbers. Another area that may be somewhat concerning is the made to order production style. Without knowing how sales are going to increase, especially based on the economic...
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...Advanced Variance Analysis: Calculation and Interpretation Subject: Professional 1 Strategic Management Accounting. Variance analysis is examinable both at Formation 2 (Management Accounting) and at Professional 1 (Strategic Management Accounting) levels. One main difference in syllabus between the two papers is that the Professional 1 (Strategic Management Accounting) syllabus includes ‘advanced’ variances, as follows: • • • • Materials mix & materials yield variances; Sales mix & sales quantity variances; Planning & operational variances; Market share & market size variances. Two issues which students need to master in order to score well in a question on advanced variance analysis are: 1. Accurate knowledge of the formulas. In my experience, examination candidates are much more likely to remember the formulas correctly if they understand the relationship between ‘advanced’ variances and ‘basic’ variances. Therefore, this will guide my approach to the examples in this article. 2. Ability to write a good quality narrative interpretation of the causes of the variances. The golden rule here is that it is not adequate to explain each variance in isolation. Thus, it is not enough to write (for example) ‘this company had an unfavourable market size variance because its actual market share was less than its budgeted market share’. You need to explain the apparent reasons why their actual market share was less than their budget market share, and...
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