Btechnd-Analyse 5 Variances of Yuri’s Budget

Analyse 5 variances of Yuri’s budget. Suggest reason for the results and make appropriate recommendation.

 BudgetActualVariance
Units sold10000075000(25000)
Material1500022500(7500)
Direct Labour22500243751875

Variance                       

 MaterialLabour
Price/ rate variance(4500)3750
Usage / efficiency variance(3000)(5625)
Total variance(7500)(1875)

Following are variances in the business operations of Yuri’s organisation:

Material price variances are the variance that measures difference between budgeted price of material purchase and actual price at which material is purchase. In case of Yuri’s business actual material price is higher than budgeted material price. For this, material procurement department will be responsible for the same.

Material usage variance is the variance in which material usage is controlled and managed so that there budgeted figure can be achieved. But there is adverse material usage variance in case of Yuri’s business of £3,000. In this case, production manager will be responsible for the over usage of material.

Labour rate variance is the variance in which difference between budgeted labour rate and actual labour rate. Labour rate varies because of many reasons like change inflation rate,labour availability, type of labour, etc. In this case, labour rate variance is favourable as there is saving in terms of labour rate.

Labour efficiency variance is the variance which is used to calculate difference in use of labour hours as per budget and actual use of labour hours. In case of Yuri’s business, labours are used more than budgeted hours and have adverse labour efficiency variance.

Sales volume variance is the variance under which sales quantity required to be sold as per budget and sales quantity actually soldwere analysed.In case of Yuri’s businessthere is adverse sales volume variance of 25,000units sold less than budgeted sales units. Sales and marketing department is responsible for the same.

Explain the calculation of unit costs and make pricing decisions using relevant information

1- Explain how you would arrive at the total cost for the job and the cost per leaflet.

For calculating total cost of job, management or management accountant of business organization has to total all the expenses or cost that is incurred on the manufacturing one unit. All the direct cost i.e. material cost, labour cost and other direct cost shall be added to calculate prime cost. Then all the indirect cost i.e. factory cost, office cost, administrative cost and selling & distribution cost shall be added to get total cost of job and the cost per leaflet. Total cost is when divided by no. of units then it is known as unit cost or per unit cost.

2- Calculate the total production cost.

ParticularsAmount (in £)Amount (in £)Amount (in £)
2 hours2.5 hours1.5 hours
Material cost:

Paper

Ink

 

£612

£18

 

£612

£18

 

£612

£18

Labour cost£30£22.5£13.5
Prime cost£660£652.5£643.5
Factory overhead£110£137.5£82.5
Production cost£770£790£726
Selling, distribution and administration cost£40£50£30
Total cost£810£840£756
Profit @ 10 %£90£93.33£84
Selling price£900£933.33£840
3- Calculate the price that the company must quote for the job

Selling price is calculated when we add profit margin to the total cost of production. Following is the price that shall be quoted by the company for the job:

Selling price = Total cost + profit margin

£ 810 + 10 % = £ 900

4- Re-estimate the price that the company must quote for the job:

i- The budgeted mo. of hours that the job requires is readjusted to 2.5 hours

ii- The budgeted mo. of hours that the job requires is readjusted to 1.5 hours

ParticularsAmount (in £)Amount (in £)
2.5 hours1.5 hours
Material cost:

Paper

Ink

 

£612

£18

 

£612

£18

Labour cost£22.5£13.5
Prime cost£652.5£643.5
Factory overhead£137.5£82.5
Production cost£790£726
Selling, distribution and administration cost£50£30
Total cost£840£756
Profit @ 10 %£93.33£84
Selling price£933.33£840
Assess the viability of the project using investmentappraisal techniques

Project A

1: Calculate

YearCash FlowCumulative Cash FlowP.V. Factor @ 10%Present Value
0(50,000)(50,000)1(50,000)
13500015,0000.90931,815
230000(15,000)0.82624,780
325000(40.000)0.75118,775
430000(70,000)0.68320,490
45,860
i- Average rate of return on average capital invested (Accounting rate of return)

Average Net Profit / Average Investment x 100

Average Net Profit= Total Profit / Life of project

110,000 / 4 = 27,500

Average Investment = (Initial Investment + Residual Value) / 2

50,000 + 10,000 / 2 = 30,000

ARR = 27,500 / 30,000 * 100 = 91.67 %

ii- Pay-back period

1 + (15,000 ÷ 30000)

1.5 years or 1 year and 6 months

iii- Net Present Value

Present value of cash inflow – Present value of cash outflow

95,860 – 50,000

45,860

(Gallo, Refresher on Net Present Value 2014)

iv- Profitability Index

Profitability Index (PI) = Present value of cash inflow / Present value of cash outflow

95,860 / 50,000 = 1.92

(Jan 2012)

2- Define the internal rate of return

IRR is defined as the rate at which net present value of project i.e. present value of cash inflows are equals to present value of cash outflow.Internal rate of return is the rate that is used in the decision-makingprocess by the management in terms of mutually exclusive capital projects.Mutually exclusive project are those projects in which investment can be increased and decreased and cash flows and other characteristics of other projects can be changed with the selection of any one project. IRR is the rate that is required by the management or finance managerfrom the capital project i.e. minimum rate of return. IRR is better base of decision making as it uses present value concept in calculation.Order Now

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