You have recently joined XYZ, an international company that produces a wide range of office supplies and stationary goods. In your new role as Group Management Accountant your first focus of attention is the performance of a recently acquired division – Ecover - that designs and manufactures travel cases for electronic equipment. This acquisition was part of the group’s strategic decision to diversify and increase its product range. You are currently reviewing the first quarter results for the divisions newly launched e-reader cover which is referred to as product RG13. The profitability of this product is well below expectations, and the performance of the division as a whole is under scrutiny.

 From an initial review of the internal budgeting and performance reporting processes of the division you have gathered the following information.

 The budget process starts 4 months before the year end.

• Draft budgets are prepared by the finance department and are sent out to operational managers for comment.
• Standard cost information, which is reviewed annually, is used to calculate production costs while current year actuals are used as a basis for determining non production costs.
• Senior management are responsible for setting budget targets.
• Budget targets are the basis for determining performance related incentives.
• Excel spreadsheets are used for all areas of the budget process.

Although the master budget is fixed once finalised, the division do undertake some basic variance analysis and compare actual operational results to a flexed budget. The level of variance analysis conducted is limited to total material, labour and production overhead variances. The quarterly variance statement is given in Appendix 1.

When managers have been asked to explain these variances they have blamed poor decisions at the planning stage or the use of incorrect standard cost data. Understandably, senior management are not satisfied with this situation and have asked you to investigate the variances further by quantifying the impact of both planning errors and operational variances. In addition to this, you also intend to raise some other issues at the next management meeting regarding the quality of quarterly reporting and the division’s approach to preparing budgets and variance analysis.

For this purpose you have gathered information on the actual costs for the period, the original standard costs used to prepare the budget and have calculated more accurate, up to date revised standard costs. This information is contained in Appendix 1.

Required:

 a)   Calculate the following operational variances and planning variances (where applicable):

 ·         Direct material cost

·         Direct material usage

·         Direct labour rate

·         Direct labour efficiency

·         Variable overhead efficiency

·         Variable overhead expenditure

 b)   Prepare a commentary on the findings of the operational variances calculated above.

c)   Prepare a revised budget profit statement (supported by relevant budget schedules) for the second quarter using the revised standard cost information and forecast sales information given in appendix 1.

 Ecover – product RG13

Reconciled actual profit to budget profit for the first quarter:

Supporting information:

 Budgeted sales volume for first quarter was 40,000 units but only production and sales of 36,800 were actually achieved. The selling price remained the same as budget at £20.50 per unit.

Information required for revised second quarter budget:

 Sales forecast for the second quarter is 50,000 units

• Forecast selling price is £13.50 per unit
• No opening stock of finished goods
• Target closing stock of finished goods is 5,500 units
• Closing stock of raw materials is estimated to be equivalent to one week’s production
• Opening stock of raw materials is given below
• Fixed overheads are forecast to be £178,000 for the quarter.