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“The Champions”
Consulting Firm
BySimon FoucherKenny SomervilleLeo Pérez SabaShadi MohamedGeneviève Lavigueur
AGENDA
Market Overview Problem Definition Analysis of Variances Analysis of the Results Qualitative Analysis Recommendations Conclusion
Manufactures and sells patio chairs:Metal modelPlastic model (lesser quality)
Market increased by 10% more than forecasted
MARKLEY DIVISION & ITS MARKET
Ineffective budgeting & control system:Unable to understand causes of
variances
Not able to implement pro-active corrective measures
PROBLEM DEFINITION
(In thousands of dollars)
ActualResults
StaticBudget
Favorable(Unfavorable)
Total Sales $930 $875 $55 F
Total Variable Costs
$735.8 $702.5 $(33.3) U
Total Other Costs $155.8 $101.5 $(54.3) U
Divisional operational income
$38.4 $71 $(32.6) U
STATIC VARIANCES
FLEXIBLE BUDGET
(In thousands of dollars)
ActualResults
Flex Bud Variance
Flex Budget
Volume Variance
StaticBudget
Total Sales $930 $30 F $900 $25 F $875
Total Var. Costs
$735 $(16.8) U
$719 $(16.5) U
$702.5
Total Other Costs
$155.8
$(54.3) U
$101.5 - $101.5
Divisional operational income
$38.4 $(41.1) U
$79.5 $8.5 F $71
FLEXIBLE BUDGET VARIANCES (L2)
SALES VOLUME VARIANCE
STATIC BUDGET VARIANCE
(In thousands of dollars)
ActualResults
Flex Bud Variance
Flex Budget
Volume Variance
StaticBudget
Divisional op. income
$38.4 $(41.1) U
$79.5 $8.5 F $71
FLEX BUDGET VARIANCE
$ (41.1) U $ 8.5 F
$ (32.6) U
FLEXIBLE BUDGET VARIANCES (L2)
(In thousands of dollars)
ActualResults
Flex Bud Variance
Flex Budget
Volume Variance
StaticBudget
Var. MFG Cost Variance
$49.6 $(49.6) U
- - -
FLEXIBLE BUDGET VARIANCES (L2)
Who is responsible?
What corrective measures can be applied?
Qty Purchased x (Price – Budget)
60,000 x ($5.65 - $5.00) = $(39,000)
30,000 x ($6 - $6) = $0
MATERIALS PRICE (L3)
(Qty Used – Budget) x cost
(56,000 – 55,000) x $5 = $(5,000)
(23,000 – 22,500) x $6 = $(3,000)
MATERIALS EFFICIENCY (L3)
Hours used * (Price – Budget)
9,300 x ($6 - $6) = 0$
5,600 x ($8 - $8) = $0
DIRECT LABOUR PRICE (L3)
(Hrs Used – Allowed) x Cost
(9,300 – 55,000/6 ) x $6 = $(800)
(5,600 – 22,500/4) x $8 = $200
DIRECT LABOUR EFFICIENCY (L3)
(Tot.Var.OH/Budget DLH – Budget Rate) x DLH Used
(43k+50k+19k)/9.3k = $12.04
($12.04 - $12) x 9300 = $(400)(18k+15k+12k)/5.6k = $8.04($8.04 - $8) x
5,600 = $(200)
VARIABLE OH SPENDING (L3)
(Hrs Used – Budgeted) x Rate
(9,300 - 55k/6) x $6 = $(1,600)
(5,600 – 22.5k/4) x $8 = $200
VARIABLE OH EFFICIENCY (L3)
DL DM Var OH TotalEFFICIENCYMETAL 200 (3,000) 200 (2,600)PLASTIC (800) (5,000) (1,600) (7,400)SPENDINGMETAL (200) (200)PLASTIC (400) (400)PRICEMETAL PLASTIC (39,000) (39,000)Total (600) (47,000) (2,000) (49,600)
Effect on Balance SheetCHANGES IN FINISHED GOODS INVENTORYMaterial Manufactured Sold Unit Cost ChangePLASTIC 55,000$ 60,000$ 8.00$ (40,000)$ METAL 22,500$ 20,000$ 10.00$ 25,000$
CHANGES IN RAW MATERIALS INVENTORY
Material Required Purchased Cost ChangePLASTIC $ 56,000 $ 60,000 $ 5.65 $ 22,600 METAL $ 23,000 $ 30,000 $ 6.00 $ 42,000
CM of metal is twice that of plastic.
Majority of the variances come from flexible budget variance ($41,100 U)
Mostly cost of plastic: $39,000 U
EfficiencyPlastic: ($7,400U)Metal: ($2,600U)
ANALYSIS OF RESULTS
Fluctuations in inventory due to:Purchasing more materials than required
Building inventories for MetalLiquidating inventories for Plastic
These fluctuations do not affect the IS
ANALYSIS OF RESULTS
QUALITATIVE ANALYSIS
Major causes of variances: Purchase prices of raw materials Waste
Intra Q1 status report without details: Management was not able to implement corrective actions .
Q1 average price of plastic (10.50$) might be due to raising list price as corrective measure
Sales volumes were: Higher for lower CM item (Plastic @14%) Lower for higher CM item (Metal @27%)
QUALITATIVE ANALYSIS
RECOMMENDATION
Implement a flexible budget and update it monthly
Change list prices: Plastic +1$ Metal -1$
Adjust the budgeted costs per unit
CONCLUSION
PERCENT % TABLE