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a) Prepare a work sheet showing the fixed and flexible budgets, actual results and variances for March
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Fixed |
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Flexible |
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Actual |
Variances |
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Sales |
units |
3000 |
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3500 |
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3,500 |
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Selling price |
5 |
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5 |
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5.2 |
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€ |
€ |
€ |
€ |
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€ |
€ |
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Sales |
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15000 |
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17500 |
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18,200 |
700 |
F |
Less cost of sales |
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Mat A |
2.50 |
7,500 |
2.5 |
8750 |
(1400 x 5.5) |
7,700 |
1,050 |
F |
Mat B |
0.75 |
2250 |
0.75 |
2625 |
(925 x 3.5) |
3,237.50 |
-612.50 |
A |
Mat C |
1.00 |
3000 |
1 |
3500 |
(1500 x 2.4) |
3,600 |
-100 |
A |
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12,750 |
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14,875 |
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14,537.5 |
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Gross profit |
2,250 |
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2,625 |
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3,662.5 |
375 |
F |
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b) Calculate the materials price and usage variances
Materials price and usage variances |
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Price |
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Usage |
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Total |
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(std price - act price) x act usage |
(Std usage -act usage) std price |
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Ingredient A |
(5.00 - 5.5) x 1400 |
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(1750 - 1400) 5.00 |
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(700) A |
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1750 F |
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1050F |
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Ingredient B |
(3.0 - 3.5) x 925 |
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(875 - 925) x 3 |
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(462.5) A |
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(150 )A |
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(612.5) A |
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Ingredient C |
(2.5 - 2.4) x 1500 |
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(1400 - 1500)x 2.5 |
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150F |
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(250)A |
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(100)A |
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(1012.5) A |
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1350 F |
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337.5 |
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Note the standard usage is calculated as 3,500 units x 0.5 (ingredient A); 0.25 (ingredient B) and 0.4 (ingredient C)
c) Prepare a statement reconciling the budgeted gross profit to actual
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€ |
€ |
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Budget gross profit |
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2250.00 |
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Sales price variance |
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700.00 |
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Sales margin volume variance |
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375.00 |
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Materials price variance |
(700 + 462.5 - 150) |
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-1012.50 |
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Materials usage variance (1750 - 150 - 250) |
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1350.00 |
1412.50 |
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Actual gross profit |
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3662.50 |
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d) Briefly comment on the significance of the variances calculated
Overall actual gross profit is €1412.5 or 62.7%greater than budgeted. The main reasons for this are as follows
Sales price variance: The business has achieved a higher average price than budgeted. It budgeted on an average price of €5.00 but achieved €5.2 and increase of 4%. This ensures a positive price variance of €700 and thus actual profit was 31% (700/2250) greater due to this price variance. Management should assess the reasons for this including questioning the budgeted target set.
Sales margin volume variance: Despite achieving a higher price the business managed to increase sales volume by 500 units or 16.67% (500/3000). This created a positive variance of €375 and thus actual profit was 16.67% higher due to the increase in sales. Again management must question the budget figure. Was it too easily achievable? Were there random events that influenced the sales level.
Materials variances: The overall materials cost variance is a positive variance of €337.5. This can be further analysed and can be broken into its two components parts as follows
- Materials price variance: This is an adverse variance of €1012.5. The business paid more for their materials than they expected. This is a significant variance as it amounts to 45% of budgeted profit. In particular Materials A and B had adverse price variances whereas Materials C had a small positive variance. Management must investigate reasons for these variances. Did the purchasing manager seek competitive pricing to ensure the best value is obtained in purchasing? Did the company avail of quantity discounts. How often are the standards reviewed to reflect reality? Was there simply a general increase in the price of materials
- Materials usage variance: This is a positive variance of €1350 and is very significant as it amounts to 60% of budgeted profit. Possible reasons for this variance are
- The standard of quality of the materials purchased. Good quality materials can lead to less materials wastage. This could be in conjunction with an adverse materials price variance.
- The quality and age of the equipment used. If the company is using more up to date equipment this can lead to greater levels of efficiency.
- Maybe the standard for materials usage needs to be revised.
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