The Champions Consulting Firm: Market Analysis and Budgeting Challenges
The Champions Consulting Firm, led by Simon Foucher and team, faces budgeting and control system challenges in their market analysis for the Markley Division. Issues with understanding variances and implementing corrective measures are highlighted through static and flexible budget variances. Discover the complexities of operational income and material price variances in this detailed case study.
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Presentation Transcript
The Champions Consulting Firm By Simon Foucher Kenny Somerville Leo P rez Saba Shadi Mohamed Genevi ve Lavigueur
AGENDA Market Overview Problem Definition Analysis of Variances Analysis of the Results Qualitative Analysis Recommendations Conclusion
MARKLEY DIVISION & ITS MARKET Manufactures and sells patio chairs: Metal model Plastic model (lesser quality) Market increased by 10% more than forecasted
PROBLEM DEFINITION Ineffective budgeting & control system: Unable to understand causes of variances Not able to implement pro-active corrective measures
STATIC VARIANCES Actual Results Static Budget Favorable (Unfavorable) (In thousands of dollars) $930 $875 $55 F Total Sales $735.8 $702.5 $(33.3) U Total Variable Costs $155.8 $101.5 $(54.3) U Total Other Costs $38.4 $71 Divisional operational income $(32.6) U
FLEXIBLE BUDGET VARIANCES (L2) Actual Results Flex Bud Variance Flex Budget Volume Variance Static Budget (In thousands of dollars) $930 $900 $875 Total Sales $30 F $25 F $735 $719 $702.5 Total Var. Costs Total Other Costs Divisional operational income $(16.8) U $(16.5) U $155.8 $101.5 $101.5 $(54.3) U - $38.4 $79.5 $71 $(41.1) U $8.5 F
FLEXIBLE BUDGET VARIANCES (L2) Actual Results Flex Bud Variance Flex Budget Volume Variance Static Budget (In thousands of dollars) $38.4 $79.5 $71 Divisional op. income $(41.1) U $8.5 F SALES VOLUME VARIANCE FLEX BUDGET VARIANCE $ (41.1) U $ 8.5 F STATIC BUDGET VARIANCE $ (32.6) U
FLEXIBLE BUDGET VARIANCES (L2) Actual Results Flex Bud Variance Flex Budget Volume Variance Static Budget (In thousands of dollars) $49.6 - - Var. MFG Cost Variance $(49.6) U - Who is responsible? What corrective measures can be applied?
MATERIALS PRICE (L3) Qty Purchased x (Price Budget) 60,000 x ($5.65 - $5.00) = $(39,000) 30,000 x ($6 - $6) = $0
MATERIALS EFFICIENCY (L3) (Qty Used Budget) x cost (56,000 55,000) x $5 = $(5,000) (23,000 22,500) x $6 = $(3,000)
DIRECT LABOUR PRICE (L3) Hours used * (Price Budget) 9,300 x ($6 - $6) = 0$ 5,600 x ($8 - $8) = $0
DIRECT LABOUR EFFICIENCY (L3) (Hrs Used Allowed) x Cost (9,300 55,000/6 ) x $6 = $(800) (5,600 22,500/4) x $8 = $200
VARIABLE OH SPENDING (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 EFFICIENCY (L3) (Hrs Used Budgeted) x Rate (9,300 - 55k/6) x $6 = $(1,600) (5,600 22.5k/4) x $8 = $200
DL DM Var OH Total EFFICIENCY METAL PLASTIC SPENDING METAL PLASTIC PRICE METAL PLASTIC Total 200 (3,000) (800) (5,000) (1,600) (7,400) 200 (2,600) (200) (400) (200) (400) (39,000) (39,000) (600) (47,000) (2,000) (49,600)
CHANGES IN FINISHED GOODS INVENTORY Material Manufactured Sold Effect on Balance Sheet PLASTIC 55,000 $ $ METAL 22,500 $ $ Unit Cost $ $ Change $ $ 60,000 20,000 8.00 10.00 (40,000) 25,000 CHANGES IN RAW MATERIALS INVENTORY Material Required PLASTIC METAL Purchased Cost Change $ 56,000 $ 60,000 $ 5.65 $ 22,600 $ 23,000 $ 30,000 $ 6.00 $ 42,000
ANALYSIS OF RESULTS 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 Efficiency Plastic: ($7,400U) Metal: ($2,600U)
ANALYSIS OF RESULTS Fluctuations in inventory due to: Purchasing more materials than required Building inventories for Metal Liquidating inventories for Plastic These fluctuations do not affect the IS
QUALITATIVE ANALYSIS Major causes of variances: Purchase prices of raw materials Waste Intra Q1 status report without details: Management was not able to implement corrective actions .
QUALITATIVE ANALYSIS Q1 average price of plastic (10.50$) 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%)
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
