TERM REPORT ON CASE STUDY

FARR CERAMICS PRODUCTION DIVISION: A BUDGETARY ANALYSIS

Course Title: Management Accounting

Course Code: ACN202

Section: 01
Semester: Summer 2021

Submitted By:

Name: Mohammed Nahiyan Mollah

ID: 1820162

Submitted To: Ms. Nimat Zarin

Submission Date: 30/08/2021

TABLE OF CONTENTS

INTRODUCTION .................................................................................................................................................
2

PER-UNIT FIXED COST ALLOCATED TO PRODUCTION ................................................................................................

2

PER-UNIT VARIABLE COST ALLOCATED TO PRODUCTION ...........................................................................................

3

THE ACTUAL COST PER UNIT OF PRODUCTION ........................................................................................................

3

THE ACTUAL COST PER UNIT OF SHIPPING .............................................................................................................

3

FLEXIBLE BUDGET ..............................................................................................................................................

4

FLEXIBLE BUDGET PERFORMANCE REPORT .............................................................................................................

5

DIRECT MATERIAL VARIANCES .............................................................................................................................

7

DIRECT LABOUR VARIANCE ..................................................................................................................................

7

SENSITIVITY ANALYSIS .........................................................................................................................................

8

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 Introduction

In state-of-the-art production facilities, FARR Ceramics manufactures world-class ultra-white

hard porcelain dinnerware. The company's production facility is located in Gazipur, Dhaka.
FARR's expert crew has undergone worldwide training, and there are also international
specialists working at the production facility, assuring FARR's market leadership position.

Due to a reduction in the requested amount for a specific type of ceramic cup that is regularly
sent to a German porcelain and other home goods business, the firm has been struggling. This
German retailer has reduced its order amount in 2019 despite having a set buy volume of
2160,00 units every year since 2011.

FARR was unable to offer the required quantity to the customers due to operational problems,
resulting in a decline in order. Another concern is the growth in material prices as well as
supplier supply delays. Despite anticipating generating a profit of TK 91,200taka, the firm lost
7200taka. FARR Ceramics was worried about dwindling orders from international customers,
and steps needed to be done to solve the problem.

Per-unit Fixed Cost Allocated to Production

Particulars In-Total Per Unit (In-Total/

18000 Units)

Supervision 57,600 3.20

Rent 20,000 1.11
Depreciation 60,000 3.33
Other 10,400 0.58

148,000 8.22

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 Per-unit Variable Cost Allocated to Production

Particulars In-Total Per Unit (In-Total/

18000 Units)

Direct Material 108,000 6.00

Direct Labor 288,000 16.00
Indirect Labor 57,600 3.20
Idle Time 14,400 0.80
Cleanup Time 10,800 0.60
Miscellaneous Supplies 5,200 0.29

484,000 26.89

The Actual Cost Per Unit of Production

Particulars In-Total Per Unit (In-Total/

14000 Units)

Direct Material 85,400 6.10

Direct Labor 246,000 17.57
Indirect Labor 44,400 3.17
Idle Time 14,200 1.01
Cleanup Time 10,000 0.71
Miscellaneous Supplies 4,000 0.29

404,000 28.86

The Actual Cost Per Unit of Shipping

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Particulars In-Total Per Unit (In-Total/
14000 Units)

Variable Shipping Costs 28000 2

Flexible Budget
Units 14,000.00
Sales (14000 X 18) 672,000.00

Variable Manufacturing Costs

Direct Material (14000 x 6) 84,000.00

Direct Labor (14000 x 16) 224,000.00
Indirect Labor (14000 x 3.2) 44,800.00
Idle Time (14000 x 0.8) 11,200.00
Cleanup Time (14000 x 0.6) 8,400.00
Miscellaneous Supplies (14000 x 0.28889) 4,044.44
Total Variable Manufacturing Cost 376,444.44
Variable Shipping Cost 22,400.00
Total Variable Costs 398,844.44
Contribution Margin 273,155.56

Non-variable Manufacturing Costs

Supervision 57,600.00
Rent 20,000.00
Depreciation 60,000.00
Other 10,400.00
Total non-variable Manufacturing Costs 148,000.00
Selling and Administrative Costs 112,000.00
Total non-variable and Programmed Costs 260,000.00

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 Operating Income 13155.56

Flexible Budget Performance Report

Actual Revenue Flexible Activity Planning
Results and Budgets Variances Budget
Spending
Variances

Units 14,000 14000 18000

Sales 686,000 14,000 F 672000 (192,000) U 864000

Variable
Manufacturing Costs
Direct Material 85,400 1,400 U 84000 (24,000) F 108000
Direct Labor 246,000 22,000 U 224000 (64,000) F 288000
Indirect Labor 44,400 (400) F 44800 (12,800) F 57600
Idle Time 14,200 3,000 U 11200 (3,200) F 14400
Cleanup Time 10,000 1,600 U 8400 (2,400) F 10800
Miscellaneous 4,000 (44) F 4044.44 (1,156) F 5200
Supplies
Total Variable 404,000 27,556 U 376,444 (107,556) F 484,000
Manufacturing Cost
Variable Shipping 28,000 5,600 U 22400 (6,400) F 28800
Cost
Total Variable Costs 432,000 33,156 U 398,844 (113,956) F 512,800
Contribution Margin 254,000 (19,156) U 273,156 (78,044) U 351,200
Non-variable
Manufacturing Costs

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Supervision 58,800 1,200 U 57600 - 57600

Rent 20,000 - 20000 - 20000

Depreciation 60,000 - 60000 - 60000
Other 10,400 - 10400 - 10400

Total non-variable 149,200 1,200 U 148,000 - 148,000

Manufacturing Costs

Selling and 112,000 112000 112000

Administrative Costs

Total non-variable and 261,200 1,200 U 260,000 260,000

Programmed
Costs

Operating Income (7,200) (20,356) U 13,156 (78,044) U 91,200

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The performance analysis report in Table I of the case study reveals that in May, the division lost
Tk 7,200 instead of the projected profit of Tk 91,200. Another noteworthy characteristic is that,
with the exception of supervision fees, most of the expenditures are within or close to budget.

Direct Material Variances

Actual Quantity of Input at Actual Quantity of Standard Quantity Allowed for Actual
Actual Price (AQ X AP) Input at Standard Output at Standard Price (SQ X SP)
Price (AQ X SP)

1,820 kg x Taka 46.92 1,820 kg x Taka 46 14,000 Cups x .13kg/Cup x Taka 46

85,394 Taka 83,720 Taka 83,720 Taka
Price Variance= 1674Taka U

Quantity Variance = 0 Taka

Direct Labour Variance

Actual Hours of Input at Actual Hours of Input at Standard Hours Allowed for
Actual Rate (AH X AR) Standard Rate (AH X Actual Output at Standard Rate
SR) (SH X SR)

5,467 Hours X Taka 45 5,467 Hours X Taka 40 14,000 Cups X 0.4 Labor Hour/ Cup
X 40 Taka

246,015 Taka 218,680 Taka 224,000 Taka

Labor Rate Variance = 27,335 Taka U

Labor Efficiency variance = 5,320 Taka F

The real price was greater than the standard price, as evidenced by the negative material price
variance of 1674 taka. The higher raw material market price is one of numerous possible
explanations for this negative pricing difference. Alternative sources of cheaper raw materials

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might be explored by the company. On the other side, unfavorable labor rate variation indicates
that the real wage rate was higher than the standard wage rate. This might be due to a rise in the
number of high-paying employees.

If Rosenthal's order decrease continues, the number of losses will increase as well, because fixed
expenses will be unaffected by the declining order quantity. As a result, if the ordered quantity
drops to zero, the loss is equal to the fixed cost, which is TK 260,000.

Sensitivity Analysis

Planning If Order If Order

Budget Decline By Increase By
6000 Units 6000 Units
Units 18,000.00 12,000.00 24,000.00
Sales (48Taka per Unit) 864,000.00 576,000.00 1,152,000.00

Variable Manufacturing Costs

Direct Material (12000,24000 x 6) 108,000.00 72,000.00 144,000.00

Direct Labor (12000,24000 x 16) 288,000.00 192,000.00 384,000.00
Indirect Labor (12000,24000 x 3.2) 57,600.00 38,400.00 76,800.00
Idle Time (12000,24000 x 0.8) 14,400.00 9,600.00 19,200.00
Cleanup Time (12000,24000 x 0.6) 10,800.00 7,200.00 14,400.00
Miscellaneous Supplies (12000,24000 x 5,200.00 3,466.68 6,933.36
0.28889)
Total Variable Manufacturing Cost 484,000.00 322,666.68 645,333.36
Variable Shipping Cost 28,800.00 19,200.00 38,400.00
Total Variable Costs 512,800.00 341,866.68 683,733.36
Contribution Margin 351,200.00 234,133.32 468,266.64

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 Non-variable Manufacturing Costs

Supervision 57,600.00 57,600.00 57,600.00

Rent 20,000.00 20,000.00 20,000.00
Depreciation 60,000.00 60,000.00 60,000.00
Other 10,400.00 10,400.00 10,400.00
Total non-variable Manufacturing Costs 148,000.00 148,000.00 148,000.00
Selling and Administrative Costs 112,000.00 112,000.00 112,000.00
Total non-variable and Programmed Costs 260,000.00 260,000.00 260,000.00

Operating Income 91,200.00 (25,866.68) 208,266.64

Based on the sensitivity analysis above, the firm would lose 25,866 TK if the present pattern of
falling ordered quantity continues and falls to 12,000 units. If the order quantity is raised by
6,000 units, however, there will be a profit of 208,266 TK. As a result, measures have to be made
with the buyer to renegotiate larger, more profitable contracts. Aside from that, the firm should
focus on the negative direct material price variation and labor rate variance.

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