Geeta Public Limited Company: Variances and Just-in-Time - Essay Example

Variances and Just-in- time A ment of reconciliation is prepared to give an explanation for variances arising as a result of expected profits tobe different from actual. It provides a clear indication on the parts of costs and quantities that changed to bring about the deviation. It makes it possible for managers to understand better the elements that have brought about the variances. The managers then examine the components of such costs, and identify the means of managing the variables in question. The performance of the business unit is, in most cases, measured in terms of how efficient managers are in utilizing resources while keeping costs at lowest level possible. They cannot control costs well without preparations the statements that reconcile expected revenue and expenditure with budgeted figures. In this regard, the paper aims at preparing a statement giving the budgeted, actual, and variances. In order to draw up the income statement, the paper presents calculations showing the possible variances using the financial data Geeta plc. Material cost variance It provides the difference between the actual and expected costs of direct materials used in the production process. It can be subdivided into material price and material usage deviations. Material price variance In obtaining this variance, a calculation below is required. The real cost is subtracted from the standard cost. Material price variance for L10 = (£ 1.55 - £ 1.60) * 2,130 = £ 106.5A Material price variance for L17 = (£ 1.75 - £ 1.9) * 2,130 = £ 426A Material usage variance Drury (2008) defines it as the difference between the actual quantity used in the production process and the budgeted amount at standard price. Material usage variance for L10 = £ 1.55 * (1,278 – 1,050) = £ 353.4F Material usage variance for L17 = £ 1.75 * (1,448.4 – 1,470) = £ 37.8A Material cost variance for L10 = £ 1.55 * 2,130 * 0.6 – £ 1,680 = £ 300.9F Material cost variance for L17 = £ 1.75 * 2,130 * 0.68 - £ 2,793 = £ 258.3A The information above reveals that L10 has a favorable variance because the actual expenditure is less than the budgeted amount whereas L17 has an adverse variance sine the actual number exceeded the budgeted expenditure. Sales revenue variance The components include selling price and sales volume variances. Selling price variance It is the difference between actual selling price and the standard selling price at standard amount (Drury, 2008). Selling price variance = (£15 - £14.5) * 2130 = £ 1,065A Sales volume variance The quantity put into books may not be the same as the one sold. It is due to favorable or unfavorable operating conditions. In obtaining the variance, the actual amount sold is subtracted from the standard number. The result is multiplied with the standard selling price. The information of Geeta plc allowed the calculation below in determining the sales volume variance. Sales volume variance = £ 14.50 (2130 -2100) = £ 435A Sales revenue variance (SRV) = selling price variance + sales volume variance = £ 1,065 + £ 435 SRV = £ 1,500 A The value obtained is adverse (A) because the sales revenue budgeted decreased. Labour variances Labour cost variance has been given a definition by Drury (2008) as the difference between the actual labour cost incurred and the budgeted cost. It is made up of labour rate variance and labour efficiency variance. Labour rate variance is the difference between actual wage rate and standard wage rate at standard hours. Labour rate variance = (£ 7.2 – 7) * 525 * 2130 /2100 = £ 106.5F Labour efficiency variance The employees in an organization may take more hours in completing tasks than what the budget allowed. Conversely, the conditions may allow the workers to spend less time in completing the activities assigned to them. Either way, the variance arises. It is calculated by finding the difference between the time allocated in the budget and the real time taken at standard wage rate (Lucey, 2002). Labour efficiency variance = (14 * 2130 / 60 -525) * 7.2* 2130 /2100 = £ 204.5A Labour cost variance = £7.2 * 14 * 2130 / 60 - £ 3675 = £ 96.6A Variable production overhead variance It is the variance that arises in support department when the duties discharged vary depending on the needs of the business. It is calculated as shown below; Variable production overhead variance = £ 2.1 * 14 * 2130 / 60 - £ 1260 = £ 216.3A Fixed production overhead variance = £ 9 * 14 * 2130 / 60 - £ 4725 = £ 252A Income statement Item STD Q / H Actual Q/ H STD P £ Actual P £ Budgeted £ Actual £ Variance £ Sales Revenue 2,130 2,100 15 14.5 31,950 30,450 1,500 A Less cost of prod. Direct material L10 1,278 1,050 1.55 1.6 1,980.9 1,680 300.9 F L17 1,448.4 1,470 1.75 1.9 2,534.7 2,793 258.3 A Direct labour cost 497 525 7.2 7 3,578.4 3,675 96.6 A Variable production O/H 497 525 2.1 2.4 1,043.7 1,260 216.3A Fixed production O/H 497 525 9 9 4,473 4,725 252 A Total Prod. Cost 13,610.7 14,133 522.3A Profit 18339.3 16317 2022.3 A In every organization, decision making process requires certain information. The crucial information involves cost analysis. The costs have different behavior, and it becomes necessary for management accountants to prepare cost reports allowing efficient management of costs. The statements categorize costs. In doing so, the managers are able to identify relevant and irrelevant costs. Lucey (2002) defines relevant cost as the one that can influence the decisions to be made by rational managers. On the other hand, costs that have no influence at all on the decisions to be made are described as irrelevant costs. In other words, their incurrence or non-incurrence does not in any way alter the decisions that are made (Drury, 2008). In the operating statement above, several costs have been included in calculating the cost of the product. The cost part includes, direct material costs, labour costs, variable overhead costs, and fixed overhead costs. The first three can be classified as relevant costs whereas the last one is an example of irrelevant cost. It is irrelevant because whether or not production occurs, the cost will be incurred. The managers can control costs through such classifications. They will focus on the relevant costs. In this case, they will evaluate alternative courses of action at their disposal. An option can be an alternative supplies or raw material. The one associated with less cost will be considered. However, quality is also considered in selecting either an alternative supplies or raw material. In the case where selection of any of the two is likely to be insignificant, the material cost may become irrelevant. It implies that the managers will not exercise their control mechanism over costs that are irrelevant. The managers can also use the above statement to identify the part that contributes much cost to the product. In this way, the managers can make a decision on whether or not to terminate its usage. They can also look for the substitutes for the raw material that contributes most costs to the product while putting quality into consideration. The variances shown in the statement will also help in cost control. The managers will identify the part giving a high adverse variance. They will investigate the possible causes of the unfavorable deviations. It provides them with to come up with the list of controllable and non-controllable makes. The managers will then put mechanisms to prevent internal causes of unfavorable variances in place. Just-in-time It is a modern technique of cost management. The costs are reduced through producing goods after identifying the exact market. A manager interacts with customers and suppliers in implementing this cost management method. Drury (2008) explains that the design involves collecting the demand for the product; raw materials are ordered, and the product is produced. The need is ascertained first which, is used to allow the management determine the requirements in terms of raw materials. The product is then produced and delivered to the customers. It is a system that ensures that there are no raw materials or finished goods left as operating stock. It will avoid the costs of holding stock. Drury (2008) outlines that for this system to operate properly; it has the following requirements; It requires that defective parts to be non-existence. The defective parts should not be present because this can create a shortage. The managers determine the required raw materials depending on the quantity needed. The production process must be repetitive. It ensures that the workers learn the stages properly and avoid any delay that can make customers impatient. The supplier must be reliable. It is to avoid interruption of supply that is likely to cause delay. It requires that the setting up of machines takes least possible time. It prevents controllable delays. It requires that there is superb machine maintenance to enhance efficiency during the production process. It requires that the non-value added costs are avoided during the production process. Toyota production system is more or less the same as just-in-time approach. However, the earlier focuses on a complete minimization of waste. Differences between just-in-time (JIT) and the traditional system JIT has its support services decentralized (Drury, 2008) while, in the traditional method, the activities under the support department are centralized. The JIT process ensures that there is no or almost zero stock while the traditional design allows the management to hold substantial stock in their stores. JIT ensures that the wastage is controlled and to achieve this, the management ensures that there is total quality control. On the other hand, the traditional design does not put into consideration ways of managing wastage. It exercises some quality control. In conclusion, the paper has brought out the concepts of JIT. Mr. Bank can get a better understanding of the same through the information given in this paper. References List Drury, C.2008. Management and Cost Accounting (7th edn.). London: South-Western. Lucey, T. 2002. Costing (6th edn.). 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