TERM REPORT ON CASESTUDY

FARR CERAMICS PRODUCTION DIVISION: A BUDGETARY ANALYSIS

Submitted To Submitted By
Maqbool Quraishi Imranul Goni
Lecturer of Accounting ID:1510822
Independent University, Bangladesh SEC:7

Date of submission: 3\9\2021

 TABLE OF CONTENTS

INTRODUCTION ........................................................................................................................................... 2

PER-UNIT FIXED COST ALLOCATED TO PRODUCTION .......................................................................................... 2

PER-UNIT VARIABLE COST ALLOCATED TO PRODUCTION ..................................................................................... 3

THE ACTUAL COST PER UNIT OF PRODUCTION .................................................................................................. 3

THE ACTUAL COST PER UNIT OF SHIPPING ....................................................................................................... 3

FLEXIBLE BUDGET ........................................................................................................................................ 4

FLEXIBLE BUDGET PERFORMANCE REPORT ....................................................................................................... 5

DIRECT MATERIAL VARIANCES ....................................................................................................................... 7

DIRECT LABOUR VARIANCE ............................................................................................................................ 7

SENSITIVITY ANALYSIS ................................................................................................................................... 9

 Introduction
FARR Ceramics uses the most advanced production facilities to produce world-class ultra-
white hard porcelain tableware. The company's manufacturing plant is located in Gazipur,
Dhaka. FARR's professional team has received training abroad, and international experts
work in the production workshop to ensure FARR's position as a market leader. The
company had problems due to a drop in orders for certain ceramic cups that it regularly
exports to German porcelain and other household goods stores. Although the annual fixed
purchase quantity has been 2,160.00 since 2011, this German merchant has reduced the order
size as of 2019.
Due to operational challenges, FARR was unable to provide the required quantity to buyers
who caused a drop in orders. Another problem is rising material prices and delays in supplier
deliveries. Although the company expected a profit of TK 91,200 taka, it still lost TK 7,200.
FARR Ceramics is concerned about the decline in orders from foreign buyers and needs to
work hard to solve this problem.
 Per-unit Fixed Cost Allocated to Production
Particulars In-Total Per Unit (In-Total/
18000 Units)

Supervision 57,600 3.20

Rent 20,000 1.11
Depreciation 60,000 3.33
Other 10,400 0.58
148,000 8.22

Per-unit Variable Cost Allocated to Production

Particulars In-Total Per Unit (In-Total/
18000 Units)

Direct Material 108,000 6.00

Direct Labor 288,000 16.00
Indirect Labor 57,600 3.20
Idle Time 14,400 0.80
Cleanup Time 10,800 0.60
Miscellaneous Supplies 5,200 0.29
484,000 26.89
 The Actual Cost Per Unit of Production
Particulars In-Total Per Unit (In-Total/
14000 Units)

Direct Material 85,400 6.10

Direct Labor 246,000 17.57
Indirect Labor 44,400 3.17
Idle Time 14,200 1.01
Cleanup Time 10,000 0.71
Miscellaneous Supplies 4,000 0.29
404,000 28.86

The Actual Cost Per Unit of Shipping

Particulars In-Total Per Unit (In-Total/
14000 Units)

Variable Shipping Costs 28000 2

Flexible Budget
Units 14,000.00
Sales (14000 X 18) 672,000.00

Variable Manufacturing Costs

Direct Material (14000 x 6) 84,000.00
Direct Labor (14000 x 16) 224,000.00
Indirect Labor (14000 x 3.2) 44,800.00
Idle Time (14000 x 0.8) 11,200.00
Cleanup Time (14000 x 0.6) 8,400.00
Miscellaneous Supplies (14000 x 0.28889) 4,044.44
Total Variable Manufacturing Cost 376,444.44
Variable Shipping Cost 22,400.00
Total Variable Costs 398,844.44
Contribution Margin 273,155.56

Non-variable Manufacturing Costs

Supervision 57,600.00
Rent 20,000.00
Depreciation 60,000.00
Other 10,400.00
Total non-variable Manufacturing Costs 148,000.00
Selling and Administrative Costs 112,000.00
Total non-variable and Programmed Costs 260,000.00

Operating Income 13155.56

Flexible Budget Performance Report

Actual Revenue Flexibl Activity Planning
Results and e Variances Budget
Spending Budget
Variance s
s
Units 14,00 14000 18000
0
Sales 686,000 14,000 F 672000 (192,000 U 864000
)

Variable
Manufacturing
Costs
Direct Material 85,40 1,40 U 84000 (24,000 F 108000
0 0 )
Direct Labor 246,00 22,00 U 224000 (64,000 F 288000
 0 0 )
Indirect Labor 44,40 (400) F 44800 (12,800 F 57600
0 )
Idle Time 14,200 3,00 U 11200 (3,200 F 14400
0 )
Cleanup Time 10,00 1,60 U 8400 (2,400 F 10800
0 0 )
Miscellaneous 4,00 (44) F 4044.44 (1,156 F 5200
Supplies 0 )
Total Variable 404,000 27,556 U 376,444 (107,556 F 484,000
Manufacturing Cost )
Variable Shipping 28,000 5,600 U 22400 (6,400) F 28800
Cost
Total Variable 432,000 33,156 U 398,844 (113,956 F 512,800
Costs )
Contribution 254,000 (19,156) U 273,156 (78,044) U 351,200
Margin
Non-variable
Manufacturing
Costs
Supervision 58,800 1,200 U 57600 - 57600
Rent 20,000 - 20000 - 20000
Depreciation 60,000 - 60000 - 60000
Other 10,400 - 10400 - 10400
Total non-variable 149,200 1,200 U 148,000 - 148,000
Manufacturing
Costs
Selling and 112,000 112000 112000
Administrative
Costs
Total non-variable 261,20 1,200 U 260,000 260,000
and Programmed 0
Costs
 Operating Income (7,200 (20,356) U 13,156 (78,044 U 91,200
) )

The performance analysis report in Case Study Table I shows that the department lost Tk
7,200 in May instead of the expected gain of Tk 91,200. Another notable feature is that, with
the exception of regulatory fees, most costs are below or close to budget.

Direct Material Variances

Actual Quantity of Input Actual Quantity of Standard Quantity Allowed for Actual
at Actual Price (AQ X AP) Input at Standard Output at Standard Price (SQ X SP)
Price (AQ X SP)

1,820 kg x Taka 46.92 1,820 kg x Taka 46 14,000 Cups x .13kg/Cup x Taka 46

85,394 Taka 83,720 Taka 83,720 Taka
Price Variance= 1674Taka U
Quantity Variance = 0 Taka

Direct Labour Variance

Actual Hours of Input at Actual Hours of Input Standard Hours Allowed for
Actual Rate (AH X AR) at Standard Rate (AH X Actual Output at Standard Rate
SR) (SH X SR)

5,467 Hours X Taka 45 5,467 Hours X Taka 40 14,000 Cups X 0.4 Labor Hour/ Cup
X 40 Taka

246,015 Taka 218,680 Taka 224,000 Taka

Labor Rate Variance = 27,335 Taka U
Labor Efficiency variance = 5,320 Taka F

There is a negative material price difference of 1674 Taka, indicating that the actual price is
higher than the standard price. Although there are many reasons for this negative spread, one
of them is the high market prices of raw materials. The company can find cheaper raw
materials from alternative sources. On the other hand, unfavorable changes in the labor rate
indicate that the real wage rate is higher than the standard wage rate. This may be due to the
tendency to increase employee salaries.

If Rosenthal's orders continue to decrease, the number of losses will continue to increase,
because fixed costs will not be affected because the number of orders decreases. Therefore, if
the order quantity drops to zero, the loss amount will equal the fixed cost, which is TK
260,000.

Sensitivity Analysis
Planning If Order If Order
Budget Decline By Increase By
6000 Units 6000 Units
Units 18,000.0 12,000.00 24,000.00
0
Sales (48Taka per Unit) 864,000.0 576,000.00 1,152,000.00
0

Variable Manufacturing Costs

Direct Material (12000,24000 x 6) 108,000.0 72,000.00 144,000.00
0
Direct Labor (12000,24000 x 16) 288,000.0 192,000.00 384,000.00
0
Indirect Labor (12000,24000 x 3.2) 57,600.0 38,400.00 76,800.00
0
Idle Time (12000,24000 x 0.8) 14,400.0 9,600.00 19,200.00
0
Cleanup Time (12000,24000 x 0.6) 10,800.0 7,200.00 14,400.00
0
Miscellaneous Supplies (12000,24000 x 5,200.0 3,466.68 6,933.36
0.28889) 0
Total Variable Manufacturing Cost 484,000.0 322,666.68 645,333.36
0
 Variable Shipping Cost 28,800.0 19,200.00 38,400.00
0
Total Variable Costs 512,800.0 341,866.68 683,733.36
0
Contribution Margin 351,200.0 234,133.32 468,266.64
0

Non-variable Manufacturing Costs

Supervision 57,600.0 57,600.00 57,600.00
0
Rent 20,000.0 20,000.00 20,000.00
0
Depreciation 60,000.0 60,000.00 60,000.00
0
Other 10,400.0 10,400.00 10,400.00
0
Total non-variable Manufacturing Costs 148,000.0 148,000.00 148,000.00
0
Selling and Administrative Costs 112,000.0 112,000.00 112,000.00
0
Total non-variable and Programmed 260,000.0 260,000.00 260,000.00
Costs 0

Operating Income 91,200.0 (25,866.68) 208,266.64

0
From the above sensitivity analysis, it can be seen that if the current downward trend in order
volume continues, up to 12,000 units, the company will lose 25,866 TK. On the other hand, if
the order quantity increases by 6,000 pieces, there will be a profit of TK 208,266. Therefore,
steps must be taken to renegotiate larger and more profitable contracts with the buyer. In
addition, the company must deal with direct unfavorable differences in material prices and
differences in labor rates.