80.2K

Verified Solution

Link Copied!

EY LIMITED

EY Limited produces bedframes for sale to hospitals, private hospitals and care homes in the UK. Each bed is made from a combination of different types of materials and requires a variety of different types of labour to produce.

All bed frames produced are identical and each unit uses the same type and quantity of materials and the same type and quantity of labour. Details are as follows:

	Quantity per bed frame	Price	Cost per bed frame
MATERIALS
Plastic	15KG	8 per KG	120.00
Metal	5KG	16 per KG	80.00
Wheels	6	4 per wheel	24.00
Wiring	10 metres	7 per metre	70.00
LABOUR
Machinists	2 HRS	8 per HR	16.00
Electronics	3 HRS	40 per HR	120.00
Assemblers	2 HRS	10 per HR	20.00
Finishers	1 HR	12 per HR	12.00

The standard selling price for a bed frame is 800 but sales managers have some discretion to offer discounts (e.g. for bulk purchases, new customers, loyal customers etc.).

The results for Quarter 3 (July to September) are now available and the following comparison between budgeted profit and actual profit has been prepared:

	BUDGET		ACTUAL
Production and sales	100 units		84 units
Sales	80,000		68,040
Direct materials:
Plastic	12,000		9,900
Metal	8,000		7,100
Wheels	2,400		1,980
Wiring	7,000		6,800
Direct labour:
Machinists	1,600		1,008
Electronics	12,000		9,870
Assemblers	2,000		1,570
Finishers	1,200		1,100
Fixed overhead	4,500		4,300
Net profit	29,300		24,412

Paul is the newly-appointed Managing Director of EY Limited, having started working for the company in June 2016. Paul is disappointed that the company did not hit its budgeted net profit for Q3. Workers are rewarded based on their ability to meet (or exceed) budgetary targets and Paul is anxious that he will not be able to reward his workers. He discusses the results with the Assistant Managing Director, who has been working for the company for three years.

MD (Paul): Im worried. Clearly we are doing something wrong. Could it be that there are flaws in the way that we prepare our budgets?

AMD: I know we didnt hit budget net profit, but it is not fair to look at the original budget, because the original budget was for production and sales of 100 units. In reality, we produced and sold only 84 units during the period.

MD: I know that sales can be a bit slower during summer, but I think we have a few sales managers who are not performing at their best; they just arent building relationships with customers and really pushing the products.

AMD: You must also remember that Human Resources had trouble recruiting, due to a shortage of skilled workers; we found it difficult to find electronic specialists and I think we ended up paying a much higher wage rate than we would normally pay.

MD: But we implemented some fantastic new staff training programmes for our machinists, assemblers and finishers. I would have expected those workers to be working even more efficiently than budget, following the training improvements.

AMD: And dont forget Kelly, the purchasing manager I am sure she told me that she had negotiated some really good supplier deals over the past three months. She said that she had struggled with metal and electronics, as the general market price for these materials had increased, but I am sure she said she had got a good deal for the other materials.

MD: Now that you mention materials, I remember some of the factory workers saying that some of the materials seemed to be of poor quality, leading to more mistakes and wastage.

AMD: Well I dont know whether that is true or not, but I do know that some of our tools and machinery are getting a bit out-of-date and this may be causing the labourers to feel frustrated and they may be finding it harder to work the materials as efficiently as possible.

MD: OK so maybe it is not as straightforward as simply comparing the budgeted profit with the actual profit; maybe we need to dig a bit deeper to find out the underlying causes of any variations from budget.

AMD: I agree to an extent, but we need to be careful not to spend too much time and money on this. For example, if the cost of metal is higher than budget and we already know that there has been an increase in the global market price, then what is the point in investigating the matter any further?

The following additional information is available in respect of Quarter 3:
	Quantity @ price/rate	Actual
		84 units
Sales	84 x 810	68,040
Materials:
Plastic	15.11KG @ 7.80 per KG	9,900
Metals	5.11KG @ 16.54 per KG	7,100
Wheels	6 parts x 3.929 per part	1,980
Wiring	11.37m @ 7.12 per m	6,800
Labour:
Machinists	1.5 HRS @ 8 per HR	1,008
Electronics	2.5 HRS @ 47 per HR	9,870
Assemblers	1.8 HRS @ 10.382 per HR	1,570
Finishers	0.9 HRS @ 14.55 per HR	1,100
Fixed overhead		4,300
Net profit		24,412

REQUIREMENTS

Calculate the standard contribution for one unit.

Prepare a flexed budget for Quarter 3 to support comparisons with actual results.

Calculate the following variances:

Sales volume variance Materials: plastic price variance Materials: wiring usage variance Labour: electronics rate variance Labour: finishers efficiency variance Fixed cost variance

Suggest possible causes of the variances you have calculated above in (c).

Answer & Explanation Solved by verified expert

See Answer