this assessment is an excel case study conducted in week 8 in class. You are required to work in groups of 3-4 students and critically analyse management accounting system (MAS) within your case company and suggest solutions to the identified problems. The case consists of a short case study description and an excel spreadsheet outlining financial and non-financial performance of a company. Students should install Microsoft Excel program on their computers before this assessment.
In this assessment student teams work as team of consultants that are hired by a particular company to suggest improvements to the MAS design. Students have to provide a written answer to the problems outlined by their case company managers. During this assessment, students will be using Microsoft Excel to find relevant information and conduct some basic calculations. This is an open book assessment and it will cover topics 4, 5 and 6.
ABO week 5.pptx Accounting, Behaviour and Organisations Week 5 Static and Flexible Budgets 2 Objectives After completing this topic you should be able to: Understand the concept of flexible budgeting Critique the need for standard costs and prices Explain why flexible budgets are used by managers; Recognise favourable and unfavourable variances and explain what they mean Describe the difference between efficiency and effectiveness variances Be able to prepare and calculate a flexible budget 2 Preparing Flexible Budgets Flexible budgets A flexible budget is a set of cost relationships that can be used to estimate costs and cash flows within the relevant range Budgeted sales and variable costs information is ‘flexed’ with actual sales and variable cost information to reflect values for actual volumes. Because fixed costs are not expected to change, these values are carried over from the static budget. Flexible budgets are considered ‘profit plans’ and provide detailed budget information for product or service output Used in planning and control 3 Preparing Flexible Budgets Flexible budgets and Standards Flexible budgets are prepared from the development of standards (benchmarks) required for operations Flexible budgets represent expected revenues: i.e. Iron ore is a major commodity input for steel manufacturing. Standard selling prices (set by the market) fluctuate between $50 to $200 per tonne Flexible budgets represent expected costs of the inputs - direct materials; direct labour, variable overheads and non-variable or fixed overheads i.e. Icecream production requires inputs such as milk and fruit. Standards used for budgeting might be: $2.50 per litre of milk or $1 per 1 kg of blackberries 4 Developing Standards Flexible budgets are the starting point for the analysis of variances between budgeted and actual values When developing flexible budgets it is critically important that accurate standards are developed E.g. standard selling price; standard volumes; standard direct material costs; standard direct material usage; standard overhead applied Inaccurate standards Provide misleading data for budgeting Provide misleading benchmarks to compare to actual profit performance 5 5 Types of Standards for budgeting Ideal standards Require maximum efficiency But might be difficult to attain, de-motivating for managers Influenced by purchasing power of company Kaizen standards Standards representing continuous improvement over time Have cost minimisation/reduction as their focus Standards are constantly being revised Currently attainable standards – most common Budgets achievable if operations are efficient & effective Should be challenging but achievable for motivation 6 Budgets for standards and benchmarking Actual results reveal performance for the past period Budgeted performance (Static (Master) Budget) represents the anticipated activity of a future period: But budgeted activity based on projected circumstances at the time - rarely equals actual Accountants can prepare ‘flexible budgets” so budgeted results can be measured at the actual activity level i.e. comparing “apples with apples” Flexible Budget are calculated as follows: Budgeted revenues and costs for actual level of activity Use original budgeted rates * Actual driver 7 8 Benny’s Ice cream Profit Plan (‘000) Actual (‘)000) Volume Litres$ VarianceFlexible BudgetVarianceVolume Litres$Total Variance Sales Data French Vanilla2,02028,076 2,10429,283 Macadamia Twirl 336 8,570 3508,910 Total Sales2,35636,646 2,45438,193 Less Variable cost Cost ice-cream (French Vanilla) Dairy ingredients (litres)1,91916,106 1,93416,684 Other ingredients (100gr.)1,3136,213 1,3356,367 Labour (hours)34.01988 37.101,081 Cost ice cream (Macadamia Twirl) Dairy ingredients (litres)3202,726 3182,675 Other ingredients (100gr.)2411,680 2441,699 Labour (hours)30869 28.79 839 Total variable cost 28,582 29,345 Contribution margin 8,064 8,848 Fixed costs 3,000 3,500 Profit 5,064 5,348 Typical cost standards for production 9 Variance analysis 10 Budget Variances Variance analysis involves comparing actual against budgeted results The differences (variances) might be ‘favourable or ‘unfavourable’ A favourable variance is when the difference between actual results and the flexible budget increases profits An unfavourable variance is when the difference between actual results and the flexible budget reduces profits 11 Different variances calculated The different types of variances calculated are: Static budget compared to actual results = budget variance Static budget compared to flexible budget = volume variance Flexible budget compared to actual results = price/efficiency variance 12 Budgets as benchmarks Consider the following monthly profit results for Benny’s Purple Madness Icecream Is this budget variance favourable or unfavourable variance? Page 309 It is an unfavourable variance as actual profits are $41,425 lower than the budgeted profit What has made up that difference? A flexible budget will help provide this information. 13 Static BudgetActual Results 77,70031,775 Flexible Budgets The variance between actual and budgeted profit can be explained in two ways: Competitive effectiveness variances Operating efficiency variances Flexible budgets can help to explain whether it was competitive effectiveness, operating efficiency or both factors that contributed to the variance in profit. When Benny’s accountants “flex” the budget, they use budgeted prices (selling price and cost prices) but actual volumes. In that way, they can find out what Benny’s should have achieved, given actual volume of Purple Madness ice cream sold. 14 Competitive Effectiveness Competitive effectiveness variances refer to changes in market performance and are reflected in the following: Selling Price Variance – a selling price higher than budget will impact volumes sold Volume Variance - can be drilled further to calculate: Market size variance – has the market grown or shrunk? Is this a result of manager skills or is it an external factor Market share variance – the company is selling more/less icecream compared with competitors Is this a result of managers skills or poor performance by competitors? Product Mix Variance – Benny’s icecream products have different contribution margins Is selling more higher contribution margin products, a good management strategy? 15 15 Operating efficiency Operating efficiency variances – relates to the price and usage (efficiency) of input resources (direct materials; direct labour and overheads). Price/Efficiency Variances: For example, the cost of raw materials, labour and overheads might be different to budget. The usage of the inputs into production might be different to budget. The difference might contribute to changes in quality and are related to management decisions (such as the purchase of poor/superior quality raw materials; change in supplier; more efficient workers) The difference could be contributable to a lack of management oversight and lack of good planning 16 Flexible Budgets to help understand changes in profits 17 Changes in profits (prepare a flexible budget) Competitive Effectiveness Operating Efficiency Market Size Variance Market Share Variance Variance due to Market Variance due to Product Mix Variance due to Selling Price What actions should be taken when identifying variances 18 __MACOSX/._ABO week 5.pptx Baby dream variance analysis-solution.xlsx Narative Baby dream Baby dream manufactures and sells two products in Australia. A Lightweight stroller made from aluminium alloy and a Steelcraft stroller with unique design, leatherlook handle and a large shoppping bascet. When the CFO of Baby dream, John Black, prepared the budget in November 2017, he expected and assumed that the market for strollers would grow by 0.80% compared to the previous year. When he received the Industry Report, he found that the market actually grew by 0.75%. MarketData Baby dream Market Size* actualbudget strollersstrollers Year Ended 30 June 20175,787,6765,704,582 Year Ended 30 June 20185,831,1685,833,977 * The market in which BD competes as a supplier of strollers. IncomeStatement Baby dream Income Statement Year Ended 30 June 2018 budgetactual sales revenue$'00030,01830,262 variable costs$'000(21,012)(21,396) contribution margin$'0009,0058,865 non-variable costs$'000(568)(558) net operating profit$'0008,4378,307 Product Breakdown Lightweight strollers sales volumestrollers205,000195,358 selling price$ per stroller86.46084.739 variable costs$ per stroller(60.522)(61.242) contribution margin$ per stroller25.93823.497 Steelcraft strollers sales volumestrollers97,500109,095 selling price$ per stroller126.087125.646 variable costs$ per stroller(88.261)(86.460) contribution margin$ per stroller37.82639.186 Both Products Combined sales volumestrollers302,500304,453 market share5.185%5.221% selling price$ per stroller9999 variable costs$ per stroller(69)(70) contribution margin$ per stroller29.77029.119 FlexibleBudget Baby dream Income Statement Year Ended 30 June 2018 budgetvarianceflexible budgetvarianceactualtotal variance sales revenue$'00030,01862830,646(384)30,262244 variable costs$'000(21,012)(440)(21,452)56(21,396)(384) contribution margin$'0009,0051889,194(328)8,865(140) non-variable costs$'000(568)(568)10(558)10 net operating profit$'0008,4371888,626(318)8,307(130) Product Breakdown Lightweight strollers sales volumestrollers205,000(9,642)195,358195,358 selling price$ per stroller86.46086.460(1.721)84.739(1.721) variable costs$ per stroller(60.522)(60.522)(0.720)(61.242)(0.720) contribution margin$ per stroller25.93825.938(2.441)23.497(2.441) Steelcraft strollers sales volumestrollers97,50011,595109,095109,095 selling price$ per stroller126.087126.087(0.441)125.646(0.441) variable costs$ per stroller(88.261)(88.261)1.801(86.460)1.801 contribution margin$ per stroller37.82637.8261.36039.1861.360 Both Products Combined sales volumestrollers302,5001,953304,453304,453 market share5.185%0.036%5.221%5.221% selling price$ per stroller99.2321.427100.660(1.262)99.3970.165 variable costs$ per stroller(69.463)(0.999)(70.462)0.183(70.278)(0.816) contribution margin$ per stroller29.7700.42830.198(1.079)29.119(0.651) Formulas Market Variance Formulas Report Baby dream Year Ended 30 June 2018 Performance overview: Baby dream's operating profit for the year is $130,000 (1.5%) less than planned. The $384,000 unfavourable price variance was partially offset by favourable product mix, market share, and variable cost variances. Baby dream exceeded the market share it had planned to capture, with a slight reduction in selling price for lightweight strollers. The average selling price of lightweight strollers was 2% lower than planned. The operating profit was enhanced because Baby dream sold more steelcraft strollers and less lightweight strollers than planned. The average contribution margin is $39 per steelcraft stroller (31%) compared to only $23 per lightweight stroller (28%). According to the plan for the year, 32% of strollers sold would be steelcraft strollers. The actual figure was 38%. This boosted the operating profit by $130,000. ProfitVarianceAnalysis Baby dream Profit Variance Analysis Year Ended 30 June 2018 $'000$'000$'000 Planned net operating profit8,437 market size variance(4) market share variance62 product mix variance130 volume variance188 price variance(384) variable cost variance56 non-variable cost variance10 price/cost variance(318) Total variance(130) rounding error(0) Actual net operating variance8,307 Sheet1 __MACOSX/._Baby dream variance analysis-solution.xlsx Lecture illustration week 6 solutions (1).xlsx Sheet1 Benny's IcecreamProfit Plan ('000)Actual Results ('000) Flexible Budget Sales DataVolume$Var$VarVolume$Total Variances French Vanilla2,02028,0761,16829,244392,10429,2831,207Budgeted Market Size (litres)19,633 Macadamia Twirl3368,5703578,927-173508,910340Budgeted Market Share0.1200 Total Sales2,35636,6461,52538,171222,45438,1931,547Actual Market Size (litres)20,811 Actual Market Share0.1179- 0.00208 Less Variable Costsi.Average budgeted CM @ budgeted mix (for budgeted mix)3.42275042443.4227504244 Cost ice-cream (French Vanilla)ii.Average budgeted CM @ actual mix (‘flexed’ for actual mix)3.4228225423.4229828851 Dairy ingredients (litres)1,91916,106-67016,776921,93416,684-578 Other ingredients (100 gr.)1,3136,213-2586,4711041,3356,367-154Change in mkt size * Budgeted mkt share * Budgeted avg CM (i)483.8482147405483.85Market size variance Labour (hours)34.01988-411,029-5237.101,081-93Change in mkt share * Actual mkt size * Budgeted avg CM (i)- 148.42- 148.42Market share variance Cost ice-cream (Macadamia Twirl)Change in average CM (i-ii) * Actual unit volume0.17697655590.5704584041note this change is because of absolute numbers used, rather than those with decimal places Dairy ingredients (litres)3202,726-1142,8401653182,67551335.61336.00 Other ingredients (100 gr.)2411,680-701,750512441,699-19 Labour (hours)30.00869-369056628.7983930 Total Variable Costs28,582-1,18929,77142629,345-763336 Contribution Margin8,0643368,4004488,848784426 Fixed Costs3,00003,000-5003,500-500 Profit5,0643365,400-525,348284 Net Profit - Profit Plan5,064 Benny's IcecreamProfit Plan ('000)Actual Results ('000)Volume Effects Flexible BudgetAdditional Sales Volume Contributed336 Sales DataVolume$Var$VarVolume$Total