Management Accounting

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Table of contents
Introduction2
Discussion2
Costing method & purpose of variance analysis2
Key findings3
Material price variance3
Material usage variance3
Labour rate variance4
Labour efficiency variance5
Variable overhead variance5
Fixed overhead expenditure variance6
Fixed overhead volume variance6
Variable selling and distribution variance6
Sales variance7
Responding to publicity7
Conclusion8
Appendix 1: Key findings of variance analysis9
Appendix 2: Profit Magin, Mark-up and sector information10
References11

Introduction

This report provides information regarding the method used by Merinos Ltd. in costing their new ‘Belma’ overcoat. A variance analysis was carried out and the report looks at the importance and purpose of such an analysis. This report will pay particular attention to the key findings from the variance analysis, giving possible reasons and implications due to the variances. This is followed by a review of the profit margin for the product and suggestions on responding to the recent publicity on the ‘Belma’ overcoat. Discussion

Costing method & purpose of variance analysis

Merinos Ltd. uses absoprtion costing to cost their overcoats, which means that all of the manufacturing costs are absorbed by the units produced. In the case of ‘Belma’ overcoat this means that cost of a finished overcoat will include direct materials (e.g. leather), direct labour (e.g. skilled labour), and both variable and fixed manufacturing costs (e.g. rent). Non-manufacturing costs are considered as period costs, which are costs usually associated with selling (e.g. celebrity fee) or general administration expenses. The idea behind using absorption costing is that it causes an overcoat to be measured at its complete cost. Just because costs like rent and managers salary (fixed overheads) are difficult to attribute to a particular unit of output does not mean that they were not a cost of that output. As a result such costs are allocated to products. In this respect absorption costing helps Merinos Ltd. to know the importance of the fixed costs and it does not ignore the fact that fixed costs must be met in the long run. [1]

Variance analysis done for the ‘Belma’ overcoat identifies to what extent the actual costs deviates from the standard costs and is used in an attempt to identify the causes for the differences between them. Variance analysis is important, because management could use them to identify potential inefficiencies in the manufacturing process and it helps the managers to focus on those areas of the operations that are not functioning as intended. In short, it can be used as an early warning for corrective action.

The use of standard costs provides employees with an indication of what is expected from employees against which their performance can be evaluated. The analysis could be used to set targets, which is important in a motivational sense to encourage workers to perform efficiently. Also it could be used as a tool for accountability for the managers. For example a negative material price variance can be attributed to poor buying decisions by the purchasing manager.

Variance analysis helps in cost control. That is whenever the comparision between standard costs and actual costs reveal wide and persistent differences, the situation can be investigated and action could be undertaken to avoid recurrence. [2] Key findings

A summary of the key findings of variance analysis is tabulated in Appendix 1. Material price variance

It is seen...
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