Standard costing and

Variance analysis

Prepared for
You

Prepared by
Zordan Ri Z vy
Please critically explain the following statement by using your understanding from
Managerial Accounting course
"A company can only succeed if it creates a reason for its target customers to choose it over a
competitor."

Answer: Successful managers understand that the plans they make, the variables they try to
control, and the decisions they make are influenced by their business strategy. A strategy is a
"game plan" that allows companies to attract customers by standing out from the competition.
The focal point of a company's strategy must be its target customers. A business can only be
successful if it creates a reason why customers choose it rather than a competitor. These
reasons, or what is officially called value propositions for the customer, are the essence of the
strategy.

Here, Customer value propositions tend to fall into three broad categories. They are:
a. Intimacy with the customer,
b. Operational excellence,
c. Product leadership.

Companies that adopt a strategy of Intimacy with the Customers essentially tell their
customers. "You have to choose us because we can customize our products and services to
better meet your individual needs than our competitors." For example, Nordstrom.

Companies that pursue the second value proposition for the customer, called Operational
Excellence, generally say to their target customers: "You have to choose us because we provide
products and services faster, easier and at a lower price than our competitors". For example
Google, Walmart.

Companies looking for the third customer value proposition, called Product Leadership,
typically say to their target customers: "You have to choose us because we offer better quality
products than our competitors." For example BMW, Apple.

While a company can offer its customers a combination of these three customer value
propositions, one typically outperforms the other in terms of importance.
 Assignment 1:
Final Assessment from Standard costing and Variance analysis

Q1. In some cases, a “favorable” variance can be as bad as or worse than an “unfavorable”
variance. Critically explain
Yes, I agree with the statement that a "favorable" variance can be as bad as or worse than an
"unfavorable" variance in some cases. For example, McDonald's has a standard for the number
of hamburgers that should be in a single unit. Here, a "favorable" variation would mean that
less meat was used than specified by the standard. A result is an individual unit below standard
and a dissatisfied customer.

On the other hand, too much emphasis on meeting standards can overshadow other important
goals, such as maintaining and improving quality, on-time delivery, and customer satisfaction.

Q2. “Our workers are all under labor contracts; therefore, our labor rate variance is bound to
be zero.” Discuss.
I do not agree with the statement and as we know that the labor rate variance can be
calculated as follows:
Labor rate variance= [AH*AR]-[AH*SR]
There is a variance when the actual rate is different from the standard rate. The statement says
’variance is bound to be zero when all workers are working under the labor contract.’ This
statement is completely wrong because the wages that are paid to the labor can be more than
the standard rate because the rate depends upon the labor efficiency or the requirement by the
employer, time factor, skilled workers with high hourly rates of pay can be given duties.

Assignment 2:
Final Assessment from relevant costing

The Securities and Exchange Commission is concerned about CEOs who use company-owned
airplanes for personal travel. For example, consider a CEO who uses his employers’
Gulfstream V luxury airplane to transport his family on a 2,000-mile roundtrip vacation from
New York City to Orlando, Florida. The standard practice among companies with personal
travel reimbursement policies would be to charge their CEO $1,500 for this flight based on a
per-mile reimbursement rate established by the Internal Revenue Service (the IRS rates are
meant to approximate the per-mile cost of a first-class ticket on a commercial airline).
However, critics argue that using IRS reimbursement rates grossly understates the flight costs
that are borne by shareholders. Some of these critics claim that the $11,000 incremental cost
of the flight, including fuel, landing fees, and crew hotel charges, should be reimbursed by the
CEO. Still others argue that even basing reimbursements on incremental costs understates
the true cost of a flight because fixed costs such as the cost of the airplane, crew salaries, and
insurance should be included. These costs are relevant because the excessive amount of
personal travel by corporate executives essentially requires their companies to purchase,
insure, and staff additional airplanes. This latter group of critics argues that the relevant cost
of the trip from New York City to Orlando is $43,000—the market price that would have to be
paid to charter a comparable size airplane for this flight. What is the relevant cost of this
flight? Should shareholders expect their CEO to reimburse $0 (as is the practice at some
companies), $1,500, $11,000, or $43,000? Or, should all companies disallow personal use of
corporate assets?

Assignment 3:
Final Assessment from Master Budget Assignment

Q1. “The principal purpose of the cash budget is to see how much cash the company will have
in the bank at the end of the year.” Do you agree? Explain
No, although this is clearly one of the objectives of the cash budget. The main objective is to
provide information on possible cash requirements during the budget period, so that bank
loans and other sources of financing can be anticipated and organized well in advance.

Also, the main objective of the cash budget is not to see how much cash the company will have
in the bank at the end of the year. While this is one of the objectives of the cash budget, the
main objective is to provide information on possible cash requirements during the budget
period, so that bank loans and other sources of financing can be anticipated and arranged well
in advance.

Typically, a cash budget is prepared each month, the budget period is one quarter or one
semester. This is an estimate of cash flows for one month to reflect the balance at the end of
each month. The primary goal is cash management to match receipts and payments and have
the desired surplus at the end of each month. If it is noted that payments for a particular month
could not be collected with possible income, the budget informs you in advance, negative
figures, that additional funds must be arranged with external sources.

Q2. Herbal Care Corp., a distributor of herb-based sunscreens, is ready to begin its third
quarter, in which peak sales occur. The company has requested a $40,000, 90-day loan from
its bank to help meet cash requirements during the quarter. Since Herbal Care has
experienced difficulty in paying off its loans in the past, the loan officer at the bank has asked
the company to prepare a cash budget for the quarter. In response to this request, the
following data have been assembled:
a. On July 1, the beginning of the third quarter, the company will have a cash balance of
$44,500.
b. Actual sales for the last two months and budgeted sales for the third quarter follow (all
sales are on account):

May (actual) . . . . . . . . . . . . . . . . . . . . . $250,000

June (actual) . . . . . . . . . . . . . . . . . . . . $300,000

July (budgeted) . . . . . . . . . . . . . . . . . . $400,000

August (budgeted) . . . . . . . . . . . . . . . . $600,000

September (budgeted) . . . . . . . . . . . . $320,000

Past experience shows that 25% of a month’s sales are collected in the month of sale, 70% in
the month following sale, and 3% in the second month following sale. The remainder is
uncollectible.

c. Budgeted merchandise purchases and budgeted expenses for the third quarter are given
below:

July August September

Merchandise purchases . . . . . . $240,000 $350,000 $175,000

Salaries and wages . . . . . . . . . $45,000 $50,000 $40,000

Advertising . . . . . . . . . . . . . . . $130,000 $145,000 $80,000

Rent payments . . . . . . . . . . . . . $9,000 $9,000 $9,000

Depreciation . . . . . . . . . . . . . . . $10,000 $10,000 $10,000

Merchandise purchases are paid in full during the month following purchase. Accounts payable
for merchandise purchases on June 30, which will be paid during July, total $180,000.

d. Equipment costing $10,000 will be purchased for cash during July.

e. In preparing the cash budget, assume that the $40,000 loan will be made in July and repaid
in September. Interest on the loan will total $1,200.
Required:
1. Prepare a schedule of expected cash collections for July, August, and September and for the
quarter in total.
2. Prepare a cash budget, by month and in total, for the third quarter.
3. If the company needs a minimum cash balance of $20,000 to start each month, can the loan
be repaid as planned? Explain.

Solution: