FACULTY OF ECONOMICS AND BUSINESS

Accounting, Finance, and Insurance

Management Control
Assignment 1
S. PAINTS is a local painting company. Despite the fact that it is difficult to find
experienced painters, three new painters have recently been hired. S. PAINTS focuses
on painting new apartments. Each price offer is based on the standard number of direct
labor hours and the standard material costs for the job, multiplied by two. The customer
is not able to negotiate about this price offer. Unforeseen additional costs for material
or labor (which are not incorporated in the price offer) are not billable to the customer.
The following information relates to the previous period. In this period 85 apartments
were painted.
▪ The three new painters earn exactly the same amount as the other painters:
18.80 € per hour per person. All painters together performed 2,550 hours in
total.
▪ Based on sector information the standard wage for painters is 15 € per hour,
and normally it takes 34 hours of labor to paint an apartment. 2890h total
▪ The material usage variance is positive and amounts to 6,070 €.
▪ The material price variance is zero.
▪ There were a lot of customer complaints in this period.
▪ The indirect costs are considered as fixed and were budgeted at 20,000 €. In
reality, they amount to 21,250 €.

Questions:
1. Calculate and discuss the direct labor variance, making a distinction between:
a. Wage rate variance
b. Labor efficiency variance
2. Is the wage rate variance in accordance with what you would expect based on
the available data? Discuss briefly.
3. Calculate and discuss the total cost variance.
4. Given the available information and your calculations, what was probably the
cause of the customer complaints?
Assignment 2
Bradley-Allen Ltd makes one standard product. Its budgeted operating statement for
May is as follows:

€ €
Sales 800 units 64,000
Variable costs
Direct materials Type A 12,000
Type B 16,000
Direct labour Skilled 4,000
Unskilled 10,000
Fixed overheads 12,000
54,000
Budgeted operating profit 10,000

The standard costs were as follows:

Direct materials Type A 50 €/kg

Type B 20 €/m
Direct labour Skilled 10 €/DLH
Unskilled 8 €/DLH

During May, the following occurred in reality:

▪ 950 units sold for a total of 73,000 €
▪ 310 kilos (costing 15,200 €) of type A material used in production
▪ 920 meters (costing 18,900 €) of type B material used in production
▪ skilled workers paid 4,628 € for 445 DLH
▪ unskilled workers paid 11,275 € for 1,375 DLH
▪ fixed overheads incurred 11,960 €

Question:
Prepare a statement that reconciles the budgeted to the actual profit of the business
for May. Your statement should analyze the difference between the two profit figures
in as much detail as possible.
Assignment 3

A new private hospital of 100 beds was opened to receive patients on 2 January. In
May, the supervisor of the hospital’s laundry department (a cost center) received her
first quarterly performance report from the hospital administrator.

PERFORMANCE REPORT
To: all department supervisors
From: hospital administrator

The hospital has adopted a responsibility accounting system, so you will be receiving
one of these reports quarterly. Each report compares the actual expenses of running
your department with our budget for the same period. Any variation in excess of 5%
from budget should be investigated and an explanatory memo sent to me giving
reasons for variations and proposed corrective actions.

Performance report – laundry department – 3 months to 31 March

Actual Budget Variation % Variation
(over)
under
# of patient days 8,000 6,500 (1,500) (23)
Weight of laundry processed (kg) 101,170 81,250 (19,920) (24.5)

Department expenses (in £)

Wages 4,125 3,450 (675) (19.5)
Supervisor salary 1,490 1,495 5 -
Washing materials 920 770 (150) (19.5)
Heating and power 560 510 (50) (10)
Equipment depreciation 250 250 - -
Allocated administration costs 2,460 2,400 (60) (2.5)
Equipment maintenance 10 45 35 78

TOTAL COSTS 9,815 8,920 (895) (10)

Comment: we need to have a discussion about the over-expenditure of the
department.

Questions:
1. Give a precise & comprehensive assessment of the form & content of the
performance report.
2. Re-draft, giving explanations, the performance report in a way which, in your
opinion, would make it a more effective management tool. If useful, you can
use the empty space in the Table above.
3. Which control instruments could complement the budgetary control? Provide
examples.
Assignment 4

LUX TAXIS operates a fleet of taxis in a provincial town.

BUDGET
In planning its operations for November LUX TAXIS estimated that it would carry fare-
paying passengers for 40,000 miles at an average price of 1 € per mile. However, past
experience suggested that the total miles run would amount to 250% of the fare-paid
miles. The fuel costs were budgeted at 0.08 € per mile run.

REALITY
In November revenue of 36,100 € was generated by carrying passengers for
38,000 miles. The total mileage was 105,000 miles. Total fuel costs amounted to 8,820
€.
The wages of the taxi drivers and the variable and fixed indirect costs (e.g.,
depreciation of cars) are not considered in this question.

Questions:
1. For the purpose of fuel quantity control, how would you flex the budget and
calculate the fuel quantity variance?
2. Calculate the fuel price variance.
3. Calculate the sales margin variances.
4. Interpret and explain all variances in detail.
Assignment 5

Consider the performance or evaluation report of Paul, the manager of Max Inc.’s
production department, which is a cost center. Consider the following statement: “It is
not fair to include the depreciation cost in Paul’s evaluation report as a depreciation
cost is a sunk cost”. Comment on the validity of this statement.

Unit costs Flexible Actual Variances

allowed budget acitvity
Units produced

Variable costs
Direct labor £2.00 £1,800 £1,800 £0
Direct materials £1.50 £1,350 £1,400 -£50
Fixed costs
Depreciation £2,000 £2,100 -£100
Assignment 6

BRANCO Ltd. produces and sells flags. BRANCO uses responsibility accounting to
evaluate its managers. Bill is the supervisor of the manufacturing department (cost
center) and receives the performance report (variance analysis) of his department. A
part of this report is presented in the table below.
Wage rate (price) variance = Labour efficiency (quantity) variance =
(15 €/h – 16 €/h) x 100 h (115h – 100h) x 15 €/h
= - 100 € = 225 €

Bill explains the negative wage rate variance as follows: “my workmen received a
higher hourly wage than budgeted due to overtime premiums. Due to booming
business my workmen had to perform overtime, compared to the original budget”.
Given the variances, is Bill’s claim credible or impossible? Explain your answer.