Question

1. Maximin Ltd manufactures parts that are used as components by car manufacturers.

All of their materials are imported.

The following information from last year is shown below:

	Budget	Actual
Units	375,000	350,000
	£ ‘000s	£ ‘000s
Sales	28,125	28,000
Variable Costs
Materials	5,625	5,600
Labour	1,875	1,575
Distribution	1,125	1,085
Total Variable Costs	8,625	8,260
Contribution	19,500	19,740
Fixed Costs
Quality control	210	170
Premises	4,000	4,120
Administration	2,500	2,400
Total Fixed Costs	6,710	6,690
Operating Profit	12,790	13,050

Required:

Prepare a summary that shows the variances, discusses possible reasons for the variances, and in the case of adverse variances, how they might be avoided in future.

Answer 1

£ ‘000s except units	Budget	Actual	Variance
Units	375,000	350,000	(25,000)
Sales	28,125	28,000	(125)
Variable Costs
Materials	5,625	5,600	25
Labour	1,875	1,575	300
Distribution	1,125	1,085	40
Total Variable Costs	8,625	8,260	365
Contribution	19,500	19,740	240
Fixed Cost
Quality Control	210	170	40
Premises	4,000	4,120	(120)
Adminstration	2,500	2,400	100
Total Fixed Costs	6,710	6,690	20
Operating Profit	12,790	13,050	260

Possible cause for variance : $Sales is down becasue number of units sold is less than budget, Total Variable cost is decreases vs budget because of the volume actual units is lower than budget. Total Fixed cost is lower might be control in the quality budget and adminstration improved the variance.

Adverse Variance : Premises cost is high than budget , to avoid the same in future company should look after the office space alternative , new vednor to figure it out to reduce the premises cost, can also fins cut in the area where it is possible to do so that actual amount will be lower than budget.