Polisar Case
Polysar Limited
Respected members of Board of Directors:
In this report, I will discuss the performance of NASA Division for the past 9 months during the fiscal year with special attention to the meaning and accuracy of the volume variance. Then I will identify the issues of the best sales and production strategy for EROW Division, NASA Division and the Rubber Group as a whole. At last, my recommendations of changes that should be made in the management accounting performance system to improve the reporting and evaluation of the Rubber Group performance will be raised.
NASA Rubber Division’s performance:
As shown on the statement of net contribution September 1986, NASA Rubber Division’s actual net sales revenue exceeds the budget by yielding a favorable net sales variance of 4,579,000. NASA also generates a positive gross margin by accurately and reasonably budget the variable costs. NASA calculates standard variable cost per tonne of butyl by multiplying a standard utilization factor by a standard price established for each unit of input. Since feedstock prices varied with worldwide market conditions and represented the largest component of costs, it is impossible to establish standard input prices that remained valid for extended periods. Therefore, the company reset feedstock standard costs each month to a price that reflected market prices. This constant adjustment makes sure the accuracy of the measurement of the variable costs. However, NASA’s actual gross profit is almost 50% below budget because the actual total fixed costs are much higher than the budget; and volume variance would be the key factor resulting in this discrepancy.
The unfavorable 5,250,000 volume variance is considered huge, which is about 50% of the actual volume variance cost. The big gap between the actual volume variance and the budget implies some potential problems of the measurement on the volume variance. The volume variance is calculated by
Respected members of Board of Directors:
In this report, I will discuss the performance of NASA Division for the past 9 months during the fiscal year with special attention to the meaning and accuracy of the volume variance. Then I will identify the issues of the best sales and production strategy for EROW Division, NASA Division and the Rubber Group as a whole. At last, my recommendations of changes that should be made in the management accounting performance system to improve the reporting and evaluation of the Rubber Group performance will be raised.
NASA Rubber Division’s performance:
As shown on the statement of net contribution September 1986, NASA Rubber Division’s actual net sales revenue exceeds the budget by yielding a favorable net sales variance of 4,579,000. NASA also generates a positive gross margin by accurately and reasonably budget the variable costs. NASA calculates standard variable cost per tonne of butyl by multiplying a standard utilization factor by a standard price established for each unit of input. Since feedstock prices varied with worldwide market conditions and represented the largest component of costs, it is impossible to establish standard input prices that remained valid for extended periods. Therefore, the company reset feedstock standard costs each month to a price that reflected market prices. This constant adjustment makes sure the accuracy of the measurement of the variable costs. However, NASA’s actual gross profit is almost 50% below budget because the actual total fixed costs are much higher than the budget; and volume variance would be the key factor resulting in this discrepancy.
The unfavorable 5,250,000 volume variance is considered huge, which is about 50% of the actual volume variance cost. The big gap between the actual volume variance and the budget implies some potential problems of the measurement on the volume variance. The volume variance is calculated by