Answer:
Standard Costing and Variance Analysis
Using the variance formula calculating direct material and labour variance, while indicating favourable or unfavourable variance:
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Particulars
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Value
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Actual Usage
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110,000.00
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Standard price
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10.00
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Actual price
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9.00
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Material price Variance
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110,000*(10-9)
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Material price Variance (Favourable)
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110,000.00
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Particulars
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Value
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Standard price
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10.00
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Standard quantity
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100000
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Actual quantity
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110000
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Material usage/quantity Variance
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10*(100,000-110,000)
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Material usage/quantity Variance (Unfavourable)
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(100,000.00)
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Particulars
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Value
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Actual hours worked
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22,000.00
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Standard rate per hour
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9.00
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Actual rate per hour
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9.50
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Labour rate Variance
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22,000*(9.00-9.50)
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Labour rate Variance (Unfavourable)
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(11,000.00)
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Particulars
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Value
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Standard rate per hour
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9.00
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Standard hours of actual output
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26,000.00
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Actual hours worked
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22,000.00
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Labour efficiency variance
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9.00*(26,000-22,000)
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Labour efficiency variance (Favourable)
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36,000.00
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Discussing why the variances have occurred:
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Variances
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Explanation
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Material price Variance
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The favourable price variance was mainly achieved, due to the reduction in actual price against standard price. This helped in achieving a favourable variance of $110,000. For instance, if the company has favourable variance it could reduce its cost price and attain higher profitability.
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Material usage/quantity Variance
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The unfavourable material variance is mainly conducted due to the increased actual quantity purchased by the company. This unfavourable variance was mainly conducted due to the decline in material price, which increased actual purchases of the organisation. For example decline in material price allow organisation to stock more raw materials, which increase usage variance and is unfavourable in nature.
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Labour rate Variance
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The unfavourable variance is mainly incurred, as the actual cost is higher than the standard rate taken into consideration. This indicates that the estimation in budget was not conducted according to market trend.
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Labour efficiency variance
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The favourable variance is mainly conducted due to the increment in actual productivity from standard productivity. This mainly allows the organisation to estimate efficiency of its labour in increasing its productivity.
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Explaining whether unfavourable variances should be investigated:
From the evaluation it is estimated that both unfavourable and favourable variances should be investigated to understand the factors affecting profitability of the company. However, certain criteria need to be maintained by the company, while evaluating variances, as investigating all the variance would increase expenses of the organisation. Therefore, it is not cost effective to investigate variance, which are close to budget and have immaterial differences. On the other hand, evaluation of variance directly allows the organisation to understand main reason behind the variance, which could help in increasing efficiency and effectiveness of the operation. Nielsen, Mitchell and Nørreklit (2015) mentioned that management with the evaluation of variances are able to identify loopholes in the budget preparation system, which could be adjusted to nullify variance occurrence.
Responsibility Accounting
Considering the key performance indicator in accordance with balance scorecard:
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Indicators
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Classifying Indicators
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Number of customer complaints
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Customer perspective
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Number of information system upgrades completed
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Internal business perspective
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Residual income
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Financial perspective
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New product development time
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Learning and growth perspective
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Employee turnover rate
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Internal business perspective
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Percentage of products with online help manuals
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Internal business perspective
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Customer retention
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Customer perspective
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Percentage of compensation based on performance
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Financial perspective
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Percentage of orders filled each week
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Internal business perspective
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Gross margin growth
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Financial perspective
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Number of new patents
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Learning and growth perspective
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Employee satisfaction ratings
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Internal business perspective
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Manufacturing cycle time (average length of production process)
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Internal business perspective
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Earnings growth
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Financial perspective
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Average machine setup time
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Internal business perspective
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Number of new customers
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Customer perspective
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Employee promotion rate
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Internal business perspective
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Cash flow from operations
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Financial perspective
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Customer satisfaction ratings
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Customer perspective
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Machine downtime
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Internal business perspective
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Finished products per day per employee
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Internal business perspective
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Percentage of employees with access to upgraded system
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Learning and growth perspective
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Wait time per order prior to start of production
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Internal business perspective
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Short-term Decision Making
1. Depicting whether accepting the order will affect Newton’s operating income and stating whether to accept the order or not:
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Particulars
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Value
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Amount
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Selling price
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$ 80.00
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$ 1,360,000.00
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Direct materials
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$ 39.00
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$ 663,000.00
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Direct labour
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$ 15.00
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$ 255,000.00
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Variable manufacturing overhead
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$ 6.00
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$ 102,000.00
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Total cost
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$ 60.00
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$ 1,020,000.00
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Operating income
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$ 20.00
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$ 340,000.00
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From the evaluation of above table, the relevant operating income of Newtown’s can be identified from the special order. The operating income will be around $20 from $71, which was previously obtained from $154 selling price. The fixed manufacturing overhead and variable selling expenses is not considered in the special order case, as it is one-time order conducted by the company. The factors such as variable selling expenses and fixed manufacturing overhead needs to be accommodated by the management in actual production function, which could be neglected in the special order. Seeing the profits that will be accumulated by the production of new order, the company should commence with the production and accommodate a new buyer for the organisation. Therefore, it could be estimated that the current profitability generated from the new order could be used by the company in making adequate investment decision regarding profitability and production. Hence, the managers of Newtown could accept the new order, as it might help in increasing profitability, while maintaining same level of fixed cost. Collier (2015) argued that assumption of production function without adequate research could increase cost and hamper profitability of the company.
Explaining whether the analysis is correct, as per accountants of Newtown’s:
From the evaluation of calculation and returns provided by the new order neglects the estimation made by Peter Kyler, as he is taking the expenses of fixed overhead manufacturing and variable selling expenses. This estimation is mainly increasing the total cost of production to $83 per sun glass, which is not actually the case. Moreover, the reduction of the fixed overhead manufacturing expenses and variable selling expense, while decline the total cost to $60 will providing profits of $20 per sun glass. Therefore, it could be said that the evaluation conducted by Peter Kyler was not appropriate and the company should go ahead with the production of new order.
Reference and Bibliography:
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.
Francis, B., Hasan, I., Park, J.C. and Wu, Q., 2015. Gender differences in financial reporting decision making: Evidence from accounting conservatism. Contemporary Accounting Research, 32(3), pp.1285-1318.
Nielsen, L.B., Mitchell, F. and Nørreklit, H., 2015, March. Management accounting and decision making: Two case studies of outsourcing. In Accounting Forum (Vol. 39, No. 1, pp. 64-82). Elsevier.
