Mix and yield variance

Q1. Simply Soup Limited manufactures and sells soups in a JIT environment. Soup is made in a manufacturing
process by mixing liquidised vegetables, melted butter and stock (stock in this context is a liquid used in making
soups). They operate a standard costing and variances system to control its manufacturing processes. At the
beginning of the current financial year they employed a new production manager to oversee the manufacturing
process and to work alongside the purchasing manager. The production manager will be rewarded by a salary
and a bonus based on the directly attributable variances involved in the manufacturing process

After three months of work there is doubt about the performance of the new production manager. On the one
hand, the cost variances look on the whole favourable, but the sales director has indicated that sales are
significantly down, and the overall profitability is decreasing.
The table below shows the variance analysis results for the first three months of the manager’s work.
Table 1
Month 1 Month 2 Month 3
Material Price Variance $300 (F) $900 (A) $2,200 (A)
Material Mix Variance $1,800 (F) $2,253 (F) $2,800 (F)
Material Yield Variance $2,126 (F) $5,844 (F) $9,752 (F)
Total Variance $4,226 (F) $7,197 (F) $10,352 (F)
The actual level of activity was broadly the same in each month and the standard monthly material total cost was
approximately $145,000.
The standard cost card is as follows for the period under review
$
0.90 litres of liquidised vegetables at $0.80 per litre 0.72
0.05 litres of melted butter at $4 per litre 0.20
1.10 litres of stock at $0.50 per litre 0.55
Total cost to produce 1 litre of soup 1.47
Required:
(a) Using the information in table 1:
(i) Explain the meaning of each type of variances above (price, mix and yield but excluding the total
variance) and briefly discuss to what extent each type of variance is controllable by the production
manager. (6 marks)
(ii) Evaluate the performance of the production manager considering both the cost variance results above
and the sales director’s comments. (6 marks)
(iii) Outline two suggestions how the performance management system might be changed to better reflect
the performance of the production manager. (4 marks)
(b) The board has asked that the variances be calculated for Month 4. In Month 4 the production department
data is as follows:
Actual results for Month 4
Liquidised vegetables: Bought 82,000 litres costing $69,700
Melted butter: Bought 4,900 litres costing $21,070
Stock: Bought 122,000 litres costing $58,560
Actual production was 112,000 litres of soup
Required:
Calculate the material price, mix and yield variances for Month 4. You are not required to comment on
the performance that the calculations imply. Round variances to the nearest $.

Q4. Crumbly Cakes make cakes, which are sold directly to the public. The new production manager (a celebrity
chef) has argued that the business should use only organic ingredients in its cake production. Organic
ingredients are more expensive but should produce a product with an improved flavour and give health benefits

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for the customers. It was hoped that this would stimulate demand and enable an immediate price increase for the
cakes.
Crumbly Cakes operates a responsibility based standard costing system which allocates variances to specific
individuals. The individual managers are paid a bonus only when net favourable variances are allocated to them.
The new organic cake production approach was adopted at the start of March 2009, following a decision by the
new production manager. No change was made at that time to the standard costs card. The variance reports for
February and March are shown below (Fav = Favourable and Adv = Adverse)

The production manager is upset that he seems to have lost all hope of a bonus under the new system. The sales
manager thinks the new organic cakes are excellent and is very pleased with the progress made.
Crumbly Cakes operate a JIT stock system and holds virtually no inventory.
Required:
(a) Assess the performance of the production manager and the sales manager and indicate whether the
current bonus scheme is fair to those concerned. (7 marks)
In April 2009 the following data applied:
Standard cost card for one cake (not adjusted for the organic ingredient change)

The budget for production and sales in April was 50,000 cakes. Actual production and sales was 60,000 cakes in
the month, during which the following occurred:

Required:
(b) Calculate the material price, mix and yield variances and the sales price and sales contribution
volume variances for April. (13 marks)

Q. Montreal Ltd. manufactures firelighters under contract for a major supermarket chain. Under the contract
Montreal receives a price of €1.70 per kilogram. The company normally produces 30,000 kilograms of
firelighters for the supermarket chain each month, but it occasionally varies this quantity slightly if asked to do
so.

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Montreal operates a standard absorption costing system. Fixed production overheads are budgeted at €9,600 per
month. The standards for the direct materials required to produce a kilogram of firelighters are as follows:

Direct Material Type “A” 0.6 kg.@ €0.25 per kilogram

Direct Material Type “B” 0.45 kg @ €0.40 per kilogram
Direct Material Type “C” 0.15 kg. @ €0.80 per kilogram
Total direct materials of input per kilogram of output 1.2 kg.
The only other cost is a cardboard packaging box, which Montreal purchases from a subcontractor at an agreed
price of €0.05 per kilogram of firelighters sold.

During January 2007 actual activity was as follows:

 Montreal Ltd. produced 31,000 kilograms of firelighters and supplied them to the supermarket chain at
the agreed price of €1.70 per kilogram.
 Direct materials purchased and used in production were:
Direct Material Type “A”: 16,700 kg @ €0.25 per kilogram
Direct Material Type “B”: 11,900 kg @ €0.42 per kilogram
Direct Material Type “C”: 3,800 kg @ €0.80 per kilogram
 Cardboard packaging boxes were purchased at standard cost.
REQUIRED:
(a) Calculate the standard profit per kilogram of firelighters, and the company’s total budget and actual profits
for January 2007. (3 marks)
(b) Calculate the following variances and use them to reconcile the company’s total budget and actual profits for
January:
● Direct materials price, mix and yield variances.
● Sales volume variance. (12 marks)

(c) The management accountant of Montreal Ltd. has stated: “In interpreting these variances, we need to bear in
mind that we carried out major preventive maintenance work on our production equipment at the beginning of
January, and this greatly improved its efficiency in converting direct materials into finished product”.
(i) Discuss whether the variances which you have calculated in answer to part (b) support this view. (3
marks)
(ii) Briefly explain any changes which may be required to the company's standard costing system in
consequence. (2 marks)
[Total: 20 marks]

Q2. The Organic Bread Company (OBC) makes a range of breads for sale direct to the public. The production
process begins with workers weighing out ingredients on electronic scales and then placing them in a machine
for mixing. A worker then manually removes the mix from the machine and shapes it into loaves by hand, after
which the bread is then placed into the oven for baking.
All baked loaves are then inspected by OBC’s quality inspector before they are packaged up and made ready for
sale.
Any loaves which fail the inspection are donated to a local food bank.
The standard cost card for OBC’s ‘Mixed Bloomer’, one of its most popular loaves, is as follows:

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Budgeted production of Mixed Bloomers was 1,000 units for the quarter, although actual production was only
950 units. The total actual quantities used and their actual costs were:
Kg $ per kg
White flour 408·5 1·90
Wholegrain flour 152·0 2·10
Yeast 10·0 20·00
Total 570·5

Required:
(a) Calculate the total material mix variance and the total material yield variance for OBC for the last
quarter. (7 marks)
(b) Using the information in the question, suggest THREE possible reasons why an ADVERSE
MATERIAL YIELD variance could arise at OBC. (3 marks)
(10 marks)
Solution: https://youtu.be/AtIVR7aZnvc

Q3. The Safe Soap Co makes environmentally-friendly soap using three basic ingredients. The standard cost
card for one batch of soap for the month of September was as follows:
Material Kilograms Price per kilogram ($)
Lye 0·25 10
Coconut oil 0·6 4
Shea butter 0·5 3
The budget for production and sales in September was 120,000 batches. Actual production and sales were
136,000 batches. The actual ingredients used were as follows:
Material Kilograms
Lye 34,080
Coconut oil 83,232
Shea butter 64,200
Required:
(a) Calculate the total material mix variance and the total material yield variance for September. (8
marks)

(b) In October the materials mix and yield variances were as follows:
Mix: $6,000 adverse
Yield: $10,000 favourable
The production manager is pleased with the results overall, stating:
‘At the beginning of September, I made some changes to the mix of ingredients used for the soaps. As I
expected, the mix variance is adverse in both months because we haven’t yet updated our standard cost card but,
in both months, the favourable yield variance more than makes up for this. Overall, I think we can be satisfied
that the changes made to the product mix are producing good results and now we are able to produce more
batches and meet the growing demand for our product.’
The sales manager, however, holds a different view and says:
‘I’m not happy with this change in the ingredients mix. I’ve had to explain to the board why the sales volume
variance for October was $22,000 adverse. I’ve tried to explain that the quality of the soap has declined slightly
and some of my customers have realised this and simply aren’t happy, but no-one seems to be listening. Some
customers are even demanding that the price of the soap be reduced and threatening to go elsewhere if the
problem isn’t sorted out.’
Required:
(i) Briefly explain what the adverse materials mix and favourable materials yield variances indicate about
production at Safe Soap Co in October.
Note: You are NOT required to discuss revision of standards or operational and planning variances. (4 marks)
(ii) Discuss whether the sales manager could be justified in claiming that the change in the materials mix
has caused an adverse sales volume variance in October. (3 marks)

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(15 marks)

Sales mix and quantity variance

Q1. BRK Co operates an absorption costing system and sells three products, B, R and K which are substitutes
for each other. The following standard selling price and cost data relate to these three products:

Budgeted fixed production overhead for the last period was £81,000. This was absorbed on a machine hour
basis.
The standard machine hours for each product and the budgeted levels of production and sales for each product
for the last period are as follows:
Product B R K
Standard machine hours per unit 0·3 hrs 0·6 hrs 0·8 hrs
Budgeted production and sales (units) 10,000 13,000 9,000
Actual volumes and selling prices for the three products in the last period were as follows:
Product B R K
Actual selling price per unit £14·50 £15·50 £19·00
Actual production and sales (units) 9,500 13,500 8,500
Required:
(a) Calculate the following variances for overall sales for the last period:
(i) sales price variance; (ii) sales volume profit variance;
(iii) sales mix profit variance; (iv) sales quantity profit variance
and reconcile budgeted profit for the period to actual sales less standard cost. (13 marks)

Q2. Hobart Ltd. manufactures soft drinks. The following data was used in compiling the budget for last
month:

The actual outcome for the month was in accordance with the budgetary assumptions, with the following
exceptions:
 The actual wage rate paid was €12 per hour.

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  Actual selling prices per batch were €0.50 higher than budgeted.
 Actual sales quantities were 3,000 batches of lemonade, 7,400 batches of cola and 6,600 batches
of ginger ale
REQUIRED:
(a) Calculate the following variances, and present a reconciliation of the company’s total budgeted and
actual contribution for last month:
 Direct labour rate variance.
 Sales mix variance.
 Sales quantity variance.
 Sales volume variance.
 Sales price variance. (12 marks)
(b) Explain the significance of the sales mix, sales quantity and sales volume variances.
(5 marks)
(c) Explain what is meant by market share and market size variances, and explain the potential
usefulness to the management of Hobart Ltd. of calculating these two variances. (Calculations are not
required in answering this part). (3 marks)
[Total: 20 marks]

Q3. Block Cooperates an absorption costing system and sells three types of products – Commodity 1,
Commodity 2 and Commodity 3. Like other competitors operating in the same market, Block Co is struggling to
maintain revenues and profits in face of the economic recession which has engulfed the country over the last
two years. Sales prices fluctuate in the market in which Block Co operates. Consequently, at the beginning of
each quarter, a market specialist, who works on a consultancy basis for Block Co, sets a budgeted sales price for
each product for the quarter, based on his expectations of the market. This then becomes the ‘standard selling
price’ for the quarter. The sales department itself is run by the company’s sales manager, who negotiates the
actual sales prices with customers. The following budgeted figures are available for the quarter ended 31 May
2013.

Block Co uses absorption costing. Fixed production overheads are absorbed on the basis of direct machine hours
and the budgeted cost of these for the quarter ended 31 May 2013 was $174,400. Commodity 1, 2 and 3 use 0·2
hours, 0·6 hours and 0·8 hours of machine time respectively.

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The following data shows the actual sales prices and volumes achieved for each product by Block Co for the
quarter ended 31 May 2013 and the average market prices per unit.

The following variances have already been correctly calculated for Commodities 1 and 2:
Sales price operational variances
Commodity 1: $35,760 Adverse
Commodity 2: $25,840 Favourable
Sales price planning variances
Commodity 1: $65,560 Favourable
Commodity 2: $56,240 Adverse
Required:
(a) Calculate, for Commodity 3 only, the sales price operational variance and the sales price planning
variance. (4 marks)
(b) Using the data provided for Commodities 1, 2 and 3, calculate the total sales mix variance and the
total sales quantity variance. (11 marks)
(c) Briefly discuss the performance of the business and, in particular, that of the sales manager for the
quarter ended 31 May 2013. (5 marks)
(20 marks)
Solution: https://youtu.be/e9Pq9hysEjw

Planning and Operational Variances

Q1. Bokco is a manufacturing company. It has a small permanent workforce but it is also reliant on temporary
workers, whom it hires on three-month contracts whenever production requirements increase. All buying of
materials is the responsibility of the company’s purchasing department and the company’s policy is to hold low
levels of raw materials in order to minimise inventory holding costs. Bokco uses cost plus pricing to set the
selling prices for its products once an initial cost card has been drawn up. Prices are then reviewed on a
quarterly basis. Detailed variance reports are produced each month for sales, material costs and labour costs.
Departmental managers are then paid a monthly bonus depending on the performance of their department.
One month ago, Bokco began production of a new product. The standard cost card for one unit was drawn up to
include a cost of $84 for labour, based on seven hours of labour at $12 per hour. Actual output of the product
during the first month of production was 460 units and the actual time taken to manufacture the product totalled
1,860 hours at a total cost of $26,040.
After being presented with some initial variance calculations, the production manager has realised that the
standard time per unit of seven hours was the time taken to produce the first unit and that a learning rate of 90%
should have been anticipated for the first 1,000 units of production. He has consequently been criticised by other
departmental managers who have said that, ‘He has no idea of all the problems this has caused.’

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Required:
(a) Calculate the labour efficiency planning variance and the labour efficiency operational variance
AFTER taking account of the learning effect.
Note: The learning index for a 90% learning curve is –0·1520 (5 marks)
(b) Discuss the likely consequences arising from the production manager’s failure to take into account the
learning effect before production commenced. (5 marks)
(10 marks)

Q2. Secure Net (SN) manufacture security cards that restrict access to government owned buildings around the
world. The standard cost for the plastic that goes into making a card is $4 per kg and each card uses 40g of
plastic after an allowance for waste. In November 100,000 cards were produced and sold by SN and this was
well above the budgeted sales of 60,000 cards.
The actual cost of the plastic was $5·25 per kg and the production manager (who is responsible for all buying
and production issues) was asked to explain the increase. He said ‘World oil price increases pushed up plastic
prices by 20% compared to our budget and I also decided to use a different supplier who promised better quality
and increased reliability for a slightly higher price. I know we have overspent but not all the increase in plastic
prices is my fault’ The actual usage of plastic per card was 35g per card and again the production manager had
an explanation. He said
‘The world-wide standard size for security cards increased by 5% due to a change in the card reader technology,
however, our new supplier provided much better quality of plastic and this helped to cut down on the waste.’ SN
operates a just in time (JIT) system and hence carries very little inventory.
Required:
(a) Calculate the total material price and total material usage variances ignoring any possible planning
error in the figures. (4 marks)
(b) Analyse the above total variances into component parts for planning and operational variances in as
much detail as the information allows. (8 marks)
(c) Assess the performance of the production manager. (8 marks)

Q3. Truffle Co makes high quality, hand-made chocolate truffles which it sells to a local retailer. All chocolates
are made in batches of 16, to fit the standard boxes supplied by the retailer. The standard cost of labour for each
batch is $6·00 and the standard labour time for each batch is half an hour. In November, Truffle Co had
budgeted production of 24,000 batches; actual production was only 20,500 batches. 12,000 labour hours were
used to complete the work and there was no idle time. All workers were paid for their actual hours worked. The
actual total labour cost for November was $136,800. The production manager at Truffle Co has no input into the
budgeting process.
At the end of October, the managing director decided to hold a meeting and offer staff the choice of either
accepting a 5% pay cut or facing a certain number of redundancies. All staff subsequently agreed to accept the
5% pay cut with immediate effect.
At the same time, the retailer requested that the truffles be made slightly softer. This change was implemented
immediately and made the chocolates more difficult to shape. When recipe changes such as these are made, it
takes time before the workers become used to working with the new ingredient mix, making the process 20%
slower for at least the first month of the new operation.
The standard costing system is only updated once a year in June and no changes are ever made to the system
outside of this.
Required:
(a) Calculate the total labour rate and total labour efficiency variances for November, based on the
standard cost provided above. (4 marks)
(b) Analyse the total labour rate and total labour efficiency variances into component parts for planning
and operational variances in as much detail as the information allows. (8 marks)
(c) Assess the performance of the production manager for the month of November. (8 marks)
(20 marks)

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Calculate
i. Sales mix variance
ii. Sales quantity variance
iii. Market Size Variance
iv. Market Share Variance

Q9. Spike Co manufactures and sells good quality leather bound diaries. Each year it budgets for its profits,
including detailed budgets for sales, materials and labour. If appropriate, the departmental managers are allowed
to revise their budgets for planning errors.
In recent months, the managing director has become concerned about the frequency of budget revisions. At a
recent board meeting he said ‘There seems little point budgeting any more. Every time we have a problem the
budgets are revised to leave me looking at a favourable operational variance report and at the same time a lot
less profit than promised.’
Required:
(a) Describe the circumstances when a budget revision should be allowed and when it should be refused.
(5 marks)

Two specific situations have recently arisen, for which budget revisions were sought:
Materials
A local material supplier was forced into liquidation. Spike Co’s buyer managed to find another supplier, 150
miles away at short notice. This second supplier charged more for the material and a supplementary delivery
charge on top.
The buyer agreed to both the price and the delivery charge without negotiation. ‘I had no choice’, the buyer said,
‘the production manager was pushing me very hard to find any solution possible!’ Two months later, another,
more competitive, local supplier was found.
A budget revision is being sought for the two months where higher prices had to be paid.
Labour
During the early part of the year, problems had been experienced with the quality of work being produced by the
support staff in the labour force. The departmental manager had complained in his board report that his team
were ‘unreliable, inflexible and just not up to the job’.

9
It was therefore decided, after discussion of the board report, that something had to be done. The company
changed its policy so as to recruit only top graduates from good quality universities. This has had the effect of
pushing up the costs involved but increasing productivity in relation to that element of the labour force.
The support staff departmental manager has requested a budget revision to cover the extra costs involved
following the change of policy.
Required:
(b) Discuss each request for a budget revision, putting what you see as both sides of the argument and
reach a conclusion as to whether a budget revision should be allowed. (8 marks)

Q4. Bedco manufactures bed sheets and pillowcases which it supplies to a major hotel chain. It uses a just-in-
time system and holds no inventories.
The standard cost for the cotton which is used to make the bed sheets and pillowcases is $5 per m 2. Each bed
sheet uses 2 m2 of cotton and each pillowcase uses 0·5 m 2. Production levels for bed sheets and pillowcases for
November were as follows:
Budgeted production Actual production
levels (units) levels (units)
Bed sheets 120,000 120,000
Pillowcases 190,000 180,000
The actual cost of the cotton in November was $5·80 per m2. 248,000 m2 of cotton was used to make the bed
sheets and 95,000 m2was used to make the pillowcases.
The world commodity prices for cotton increased by 20% in the month of November. At the beginning of the
month, the hotel chain made an unexpected request for an immediate design change to the pillowcases. The new
design required 10% more cotton than previously. It also resulted in production delays and therefore a shortfall
in production of 10,000 pillowcases in total that month.
The production manager at Bedco is responsible for all buying and any production issues which occur, although
he is not responsible for the setting of standard costs.
Required:
(a) Calculate the following variances for the month of November, for both bed sheets and pillow cases,
and in total:
(i) Material price planning variance; (3 marks)
(ii) Material price operational variance; (3 marks)
(iii) Material usage planning variance; (3 marks)
(iv) Material usage operational variance. (3 marks)
(b) Assess the performance of the production manager for the month of November. (8 marks)
(20 marks)

Q5. Glove Co makes high quality, hand-made gloves which it sells for an average of $180 per pair. The
standard cost of labour for each pair is $42 and the standard labour time for each pair is three hours. In the last
quarter, Glove Co had budgeted production of 12,000 pairs, although actual production was 12,600 pairs in
order to meet demand. 37,000 hours were used to complete the work and there was no idle time. The total labour
cost for the quarter was $531,930. At the beginning of the last quarter, the design of the gloves was changed
slightly. The new design required workers to sew the company’s logo on to the back of every glove made and
the estimated time to do this was 15 minutes for each pair. However, no-one told the accountant responsible for
updating standard costs that the standard time per pair of gloves needed to be changed. Similarly, although all
workers were given a 2% pay rise at the beginning of the last quarter, the accountant was not told about this
either. Consequently, the standard was not updated to reflect these changes. When overtime is required, workers
are paid 25% more than their usual hourly rate.
Required:
(a) Calculate the total labour rate and total labour efficiency variances for the last quarter. (2 marks)
(b) Analyse the above total variances into component parts for planning and operational variances in as much
detail as the information allows. (6 marks)
(c) Assess the performance of the production manager for the last quarter. (7 marks)
(15 marks)
Solution: https://youtu.be/a23rxaBX_G4

Q6. The School Uniform Company (SU Co) manufactures school uniforms. One of its largest contracts is with
the Girls’ Private School Trust (GPST), which has 35 schools across the country, all with the same school
uniform.

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After a recent review of the uniform at the GPST schools, the school’s spring/summer dress has been re-
designed to incorporate a dropped waistband. Each new dress now requires 2·2 metres of material, which is
10% more material than the previous style of dress required. However, a new material has also been chosen by
the GPST which costs only $2·85 per metre which is 5% cheaper than the material used on the previous dresses.
In February, the total amount of material used and purchased at this price was 54,560 metres.
The design of the new dresses has meant that a complicated new sewing technique needed to be used.
Consequently, all staff required training before they could begin production. The manager of the sewing
department expected each of the new dresses to take 10 minutes to make as compared to 8 minutes per dress for
the old style. SU Co has 24 staff, each of whom works 160 hours per month and is paid a wage of $12 per hour.
All staff worked all of their contracted hours in February on production of the GPST dresses and there was no
idle time. No labour rate variance arose in February.
Activity levels for February were as follows:
Budgeted production and sales (units) 30,000
Actual production and sales (units) 24,000
The production manager at SU Co is responsible for all purchasing and production issues which occur. SU Co
uses standard costing and usually, every time a design change takes place, the standard cost card is updated prior
to production commencing. However, the company accountant responsible for updating the standards has been
off sick for the last two months. Consequently, the standard cost card for the new dress has not yet been
updated.
Required:
(a) Calculate the material variances in as much detail as the information allows for the month of
February. (7 marks)
(b) Calculate the labour efficiency variances in as much detail as the information allows for the month of
February. (5 marks)
(c) Assess the performance of the production manager for the month of February. (8 marks)
(20 marks)

Q7. Spike Co manufactures and sells good quality leather bound diaries. Each year it budgets for its profits,
including detailed budgets for sales, materials and labour. If appropriate, the departmental managers are allowed
to revise their budgets for planning errors.
In recent months, the managing director has become concerned about the frequency of budget revisions. At a
recent board meeting he said ‘There seems little point budgeting any more. Every time we have a problem the
budgets are revised to leave me looking at a favourable operational variance report and at the same time a lot
less profit than promised.’
Required:
(a) Describe the circumstances when a budget revision should be allowed and when it should be refused. (5
marks)
Two specific situations have recently arisen, for which budget revisions were sought:
Materials
A local material supplier was forced into liquidation. Spike Co’s buyer managed to find another supplier, 150
miles away at short notice. This second supplier charged more for the material and a supplementary delivery
charge on top. The buyer agreed to both the price and the delivery charge without negotiation. ‘I had no choice’,
the buyer said, ‘the production manager was pushing me very hard to find any solution possible!’ Two months
later, another, more competitive, local supplier was found.
A budget revision is being sought for the two months where higher prices had to be paid.
Labour
During the early part of the year, problems had been experienced with the quality of work being produced by the
support staff in the labour force. The departmental manager had complained in his board report that his team
were ‘unreliable, inflexible and just not up to the job’.
It was therefore decided, after discussion of the board report, that something had to be done. The company
changed its policy so as to recruit only top graduates from good quality universities. This has had the effect of
pushing up the costs involved but increasing productivity in relation to that element of the labour force.
The support staff departmental manager has requested a budget revision to cover the extra costs involved
following the change of policy.
Required:

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(b) Discuss each request for a budget revision, putting what you see as both sides of the argument and reach a
conclusion as to whether a budget revision should be allowed. (8 marks)

(a) A budget forms the basis of many performance management systems. Once set, it can be compared to the
actual results of an organisation to assess performance. A change to the budget can be allowed in some
circumstances but these must be carefully controlled if abuse is to be prevented.
Allow budget revisions when something has happened that is beyond the control of the organisation which
renders the original budget inappropriate for use as a performance management tool.
These adjustments should be approved by senior management who should attempt to take an objective and
independent view.
Disallow budget revisions for operational issues. Any item that is within the operational control of an
organisation should not be adjusted.

(b) Materials
Arguments in favour of allowing a revision
– The nature of the problem is outside the control of the organisation. The supplier went in to liquidation; it is
doubtful that Spike Limited could have expected this or prevented it from happening.
– The buyer, knowing that budget revisions are common, is likely to see the liquidation as outside his control
and hence expect a revision to be allowed. He may see it as unjust if this is not the case and this can be
demoralising.
Arguments against allowing a budget revision
– There is evidence that the buyer panicked a little in response to the liquidation. He may have accepted the first
offer that became available (without negotiation) and therefore incurred more cost than was necessary.
– A cheaper, more local supplier may well have been available, so it could be argued that the extra delivery cost
need not have been incurred. This could be said to have been an operational error.

Conclusion
The cause of this problem (liquidation) is outside the control of the organisation and this is the prime cause of
the overspend. Urgent problems need urgent solutions and a buyer should not be penalised in this case. A budget
revision should be allowed.

Labour
Arguments in favour of allowing a revision
– The board made this decision, not the departmental manager. It could be argued that the extra cost on the
department’s budget is outside their control.
Arguments against allowing a budget revision
– This decision is entirely within the control of the organisation as a whole. As such, it would fall under the
definition of an operational decision. It is not usual to allow a revision in these circumstances.
– It is stated in the question that the departmental manager complained in his board report that the staff level
needed improving. It appears that he got his wish and the board could be said to have merely approved the
change.
– The department will have benefited from the productivity increases that may have resulted in the change of
policy. If the department takes the benefit then perhaps they should take the increased costs as well.

Conclusion
This is primarily an operational decision that the departmental manager agreed with and indeed suggested in his
board report. No budget revision should be allowed.
An alternative view is that the board made the final decision and as such the policy change was outside the
direct control of the departmental manager. In this case a budget revision would be allowed.

Q8. A company has developed a new product. The following information was prepared by the trainee
accountant for presentation at the first performance review meeting for the new product.
Standard labour wage rate $12 per labour hour
Standard labour hours per unit 25 hours
Output to date 32 units
Actual labour hours worked 460 hours
Labour efficiency variance $4,080 favourable
The Management Accountant pointed out that this analysis ignored the learning curve and that 25 hours was the
time taken for the first unit. The Management Accountant said that a better representation of the performance

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would be obtained by splitting the variance into planning and operating elements and calculated them to be as
shown below:
Labour efficiency planning variance $4,320 favourable
Labour efficiency operating variance $240 adverse
Required:
(a) Calculate the learning rate that the Management Accountant assumed when recalculating the variances.
(6 marks)
(b) Explain TWO reasons why it is important for production planning and control purposes to identify the
learning curve. (4 marks)
(Total for Question One = 10 marks)

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Watch this video before attempting the following question https://youtu.be/u7XMZjfNIO8

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Required:

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Solution: https://youtu.be/fo97cNDC7rE

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