Management control System

Assignment II

Prof. Anusha Ganguly

By:

Shital Jhunjhunwalla

09BS0003116

Section D

Date of Submission: August 21, 2010

Analysis of variance between actual profits and budgeted profits for January 1988:
It is generally a requirement that managers prepare an explanation for variances to finance and
administration. Thresholds for reporting vary by company, but they usually consist of a
combination of variance and percent. The manager should be the best judge of what differs from
the budget. If the budget was prepared by someone else, consult any notes there may be. If there
are none, the manager’s opinion is still likely to be better than an accountant’s.
Creating a sensible, well-documented budget provides for better explanations of variances.
Detailed, accurate explanations demonstrate credibility to administration

To check the Actual Performance of the Crocker Company with respect to the Budgeted
Performance, the Performance Report is prepared. This merely depicts the Actual Performance
with respect to the Budgeted in the various basic aspects such as Sales, Cost of Sales, GP,
Expenses, NP etc.

Budgeted Profit For January (in $000s)

Column1 E F G H Total
Sales(000 units) 1000 2000 3000 4000 10000
Price/unit0.15 0.15 0.2 0.25 0.3
Revenue 150 400 750 1200 2500
Standard Variable Cost
Material 40 100 180 320 640
Direct Labor 20 40 90 160 310
Variable 20 60 90 200 370
Overhead
Total Variable 80 200 360 680 1320
Cost
Fixed Overhead 20 60 60 160 300
Selling Expenses 250
R&D 300
Administrative Expenses 120
Total Expenses 670
Conribution 70 200 390 520 1180
Net Profit Before Tax 210
Gross Profit 50 140 330 360 880

Selling Price Variance

Column1 E F G H Total
Actual Volume(000) 1000 1000 4000 3000
Actual Price/Unit 0.13 0.22 0.22 0.31
Bugeted Price/Unit 0.15 0.2 0.25 0.3
Actual budget/Unit -0.02 0.02 -0.03 0.01
Unfavorable/favorable price Variance -20 20 -120 30 -90

The selling price variance is a measure of the effect on expected profit of a different
selling price to standard selling price. It is calculated as the difference between what
the sales revenue should have been for the actual quantity sold, and what it was.
It shows that the price variance is ($90000), unfavorable. Although the price variance of
Product F and H are favorable, the total variance becomes unfavorable due to Product E and G.
This brings us to the light that the actual price charged for the product were considerably low
than what was budgeted overall.

Sales Mix and Volume Variance

1 2 3 4 5 6
Product Actual Volume Budgeted Volume Difference Unit Variance
Contribution
E 1000 1000 0 0.07 0
F 1000 2000 -1000 0.1 -100
G 4000 3000 1000 0.13 130
H 3000 4000 -1000 0.13 -130
9000 10000 -1000 -100

Mix and Volume variance is ($100000) unfavorable. The volume variance results from selling
more than budgeted. The mix variance results from selling different proportions of products from
that assumed in the budget. Because products earn different contribution per unit, the sale of
different proportions of product from budgeted will result in variance. So for product E there was
no volume variance but for product F there was a variance of (1000) and for product G there was
variance of 1000 favorable and for product H a variance of (1000)

Mix Variance
 Product Budgeted Budgeted mix Actual Sales Difference Unit Variance
Proportion at actual vol. Contribution
E 1/10 900 1000 100 0.07 7
F 2/10 1800 1000 -800 0.1 -80
G 3/10 2700 4000 1300 0.13 169
H 4/10 3600 3000 -600 0.13 -78
9000 9000 18

It shows that higher proportions of products G and H were sold. Lower proportions of E and F
were sold. G and H have higher unit contributions followed by F and then E with lowest unit
contribution. The mixed variance is favorable at $ 18000. This also shows that the company has
a ‘richer’ mix i.e., higher proportion of products with higher contribution margin, which has
resulted in a favorable mix variance.

Sales Volume Variance

Product Budgeted mix Budgeted Difference Unit Contribution Volume Variance

at actual vol. Volume
E 900 1000 -100 0.07 -7
F 1800 2000 -200 0.1 -20
G 2700 3000 -300 0.13 -39
H 3600 4000 -400 0.13 -52
9000 10000   -118

The sales volume variance is the difference between the actual units sold and the
Budgeted quantity, valued at the standard profit per unit. In other words it measures
the increase or decrease in standard profit as a result of the sales volume being higher
or lower than budgeted. The sales volume variance shows unfavorability of $118,000.
This clearly shows a massive mismatch between the sale volume that was estimated and what
was actually achieved.

Revenue Variance By Product

Column1 E F G H Total
 Price Variance -20 20 -120 30 -90
Mix Variance 7 -80 169 -78 18
Volume Variance -7 -20 -39 -52 -118
-20 -80 10 -100 -190

Revenue Variance by product is 190000 unfavorable which is primarily due to products E,F &H
cause these were sold at a lower price than budgeted and also their volumes differed significantly
from the budgeted volume.

Fixed Cost Variance

Column1 Actual Budgeted Favorable/Unfavorable

Fixed Overhead 300 300 -----
Selling Expense 290 250 -40
Administrative 110 120 10
Expense
Total 700 670 -30

The fixed cost variance is ($30000) unfavorable. Selling Expenses overhead exceeded by
$40000. It indicates under recovery of overheads during the period. The company should work
on correcting the variance.

Variable Manufacturing Expense Variance

Column1 E F G H Total Actual Favorable/Unfavora

ble
Material 40 100 180 320 640 360 280
Labor 20 40 90 160 310 200 110
Overhead 20 60 90 200 370 530 -160
Total 80 200 360 680 1320 1090 230

Material cost variance is 230000 which may be due to proper use of materials and tight controls
over inventory. Labor cost variance is 110000, favorable indicating that the labour was paid less
than the standard. Overhead cost variance is (160000), unfavorable indicating the company has
to have tighter reins over its cost and should adopt measures to control it.

Summary Performance Report

 Cu Particulars pppp ComAmount
(n2
Actual Profit -70
Budgeted Profit 210
Variance 280

Analysis of Variance
Revenue Variance
Price -90
Mix 18
Volume -118
Net Revenue Variance -190

Variable Cost Variance

Material 280
Labor 110
Variable Overhead -160
Net Variable Cost Variance 230

Fixed Cost Variance

Selling Expense -40
Administrative Expense 10
Net Fixed Cost Variance -30
10
Variance

Conclusion:

Actual and budgeted profits of Crocker Company shows a considerable difference with
actual being a loss of $70,000, whereas budgeted profit was of $210,000. The difference
mainly occurred due to unfavorable variance in sales. This had the main influence in
the loss of the company. If the company could use higher sales or if the sale price could
be increased then it will be able to negotiate the existing variance and make it favorable
in the future. The company has maintained a good product mix thus the variance in this
case is favorable. The favorability in variable expense variance is merely the result of
unfavorable volume variance.