“The Champions”

Consulting Firm

BySimon FoucherKenny SomervilleLeo Pérez SabaShadi MohamedGeneviève Lavigueur

AGENDA

Market Overview Problem Definition  Analysis of Variances Analysis of the Results Qualitative Analysis Recommendations Conclusion

Manufactures and sells patio chairs:Metal modelPlastic model (lesser quality)

Market increased by 10% more than forecasted

MARKLEY DIVISION & ITS MARKET

Ineffective budgeting & control system:Unable to understand causes of

variances

Not able to implement pro-active corrective measures

PROBLEM DEFINITION

(In thousands of dollars)

ActualResults

StaticBudget

Favorable(Unfavorable)

Total Sales $930 $875 $55 F

Total Variable Costs

$735.8 $702.5 $(33.3) U

Total Other Costs $155.8 $101.5 $(54.3) U

Divisional operational income

$38.4 $71 $(32.6) U

STATIC VARIANCES

FLEXIBLE BUDGET

(In thousands of dollars)

ActualResults

Flex Bud Variance

Flex Budget

Volume Variance

StaticBudget

Total Sales $930 $30 F $900 $25 F $875

Total Var. Costs

$735 $(16.8) U

$719 $(16.5) U

$702.5

Total Other Costs

$155.8

$(54.3) U

$101.5 - $101.5

Divisional operational income

$38.4 $(41.1) U

$79.5 $8.5 F $71

FLEXIBLE BUDGET VARIANCES (L2)

SALES VOLUME VARIANCE

STATIC BUDGET VARIANCE

(In thousands of dollars)

ActualResults

Flex Bud Variance

Flex Budget

Volume Variance

StaticBudget

Divisional op. income

$38.4 $(41.1) U

$79.5 $8.5 F $71

FLEX BUDGET VARIANCE

$ (41.1) U $ 8.5 F

$ (32.6) U

FLEXIBLE BUDGET VARIANCES (L2)

(In thousands of dollars)

ActualResults

Flex Bud Variance

Flex Budget

Volume Variance

StaticBudget

Var. MFG Cost Variance

$49.6 $(49.6) U

- - -

FLEXIBLE BUDGET VARIANCES (L2)

Who is responsible?

What corrective measures can be applied?

Qty Purchased x (Price – Budget)

60,000 x ($5.65 - $5.00) = $(39,000)

30,000 x ($6 - $6) = $0

MATERIALS PRICE (L3)

(Qty Used – Budget) x cost

(56,000 – 55,000) x $5 = $(5,000)

(23,000 – 22,500) x $6 = $(3,000)

MATERIALS EFFICIENCY (L3)

Hours used * (Price – Budget)

9,300 x ($6 - $6) = 0$

5,600 x ($8 - $8) = $0

DIRECT LABOUR PRICE (L3)

(Hrs Used – Allowed) x Cost

(9,300 – 55,000/6 ) x $6 = $(800)

(5,600 – 22,500/4) x $8 = $200

DIRECT LABOUR EFFICIENCY (L3)

(Tot.Var.OH/Budget DLH – Budget Rate) x DLH Used

(43k+50k+19k)/9.3k = $12.04

($12.04 - $12) x 9300 = $(400)(18k+15k+12k)/5.6k = $8.04($8.04 - $8) x

5,600 = $(200)

VARIABLE OH SPENDING (L3)

(Hrs Used – Budgeted) x Rate

(9,300 - 55k/6) x $6 = $(1,600)

(5,600 – 22.5k/4) x $8 = $200

VARIABLE OH EFFICIENCY (L3)

DL DM Var OH TotalEFFICIENCYMETAL 200 (3,000) 200 (2,600)PLASTIC (800) (5,000) (1,600) (7,400)SPENDINGMETAL (200) (200)PLASTIC (400) (400)PRICEMETAL PLASTIC (39,000) (39,000)Total (600) (47,000) (2,000) (49,600)

Effect on Balance SheetCHANGES IN FINISHED GOODS INVENTORYMaterial Manufactured Sold Unit Cost ChangePLASTIC 55,000$ 60,000$ 8.00$ (40,000)$ METAL 22,500$ 20,000$ 10.00$ 25,000$

CHANGES IN RAW MATERIALS INVENTORY

Material Required Purchased Cost ChangePLASTIC $ 56,000 $ 60,000 $ 5.65 $ 22,600 METAL $ 23,000 $ 30,000 $ 6.00 $ 42,000

CM of metal is twice that of plastic.

Majority of the variances come from flexible budget variance ($41,100 U)

Mostly cost of plastic: $39,000 U

EfficiencyPlastic: ($7,400U)Metal: ($2,600U)

ANALYSIS OF RESULTS

Fluctuations in inventory due to:Purchasing more materials than required

Building inventories for MetalLiquidating inventories for Plastic

These fluctuations do not affect the IS

ANALYSIS OF RESULTS

QUALITATIVE ANALYSIS

Major causes of variances: Purchase prices of raw materials Waste

Intra Q1 status report without details: Management was not able to implement corrective actions .

Q1 average price of plastic (10.50$) might be due to raising list price as corrective measure

Sales volumes were: Higher for lower CM item (Plastic @14%) Lower for higher CM item (Metal @27%)

QUALITATIVE ANALYSIS

RECOMMENDATION

Implement a flexible budget and update it monthly

Change list prices: Plastic +1$ Metal -1$

Adjust the budgeted costs per unit

CONCLUSION

PERCENT % TABLE