Question

Linenpress Limited manufactures 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 pillowcases is £5 per m2. Each pillowcase uses 0.5m2 of cotton and production levels for November were as follows: Budgeted production Actual production (units) (units) Pillowcases 190,000 180,000 The actual cost of the cotton in November was £5·80 per m2 and 95,000m2 was 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 Linenpress is responsible for all buying and any production issues which occur, although he is not responsible for the setting of standard costs. Part A

Calculate the following variances for the month of November:

Material price planning variance;

Material price operational variance;

Material usage planning variance;

Material usage operational variance.

Part B Discuss the performance of the production manager for the month of November in the context of your findings in Part A.

Part C Explain how the use of planning and operational variances can lead to more effective performance evaluation in an organisation.

Answer 1

Part A

Given in question

Standard Cost = £5 per m2

Actual cost= £5.80 per m2

Actual Quantity= 95,000 m2

Now we will do a little bit calculation for other things in question.

Revised Price=( £5+ 20% of £5 ) =£6

Standard quantity for actual production= Since .50m2 is required for 1 pillow case so quantity for 180,000 pillowcase is (180,000x.50m2)= 90,000 m2

Revised quantity for actual production= since 10% more raw material is needed due to revised design.So revised quantity for 1 pillowcase is (.50m2+10% of .50m2 =.55m2)& revised quantity for total production is (180,000x.55m2)= 99,000 m2

Now we will do solution

Material price planning variance= ( Standard cost- revised cost) x Actual Quantity

                                                                = ( £5-£6) x 95,000 m2

                                                                = £95,000 Adverse

Material price operational variance= (Revised cost – actual cost) x actual quantity

                                                                = ( £6-£5.80) x 95,000 m2

                                                                = £19,000 Favourable

Material usage planning variance= (Standard quantity for actual production – revised quantity for actual production) x standard cost

                                                                =(90,000m2-99,000m2) x £5

                                                                = £45,000 Adverse

Material usage operational variance= (Actual quantity – revised quantity for actual production) x standard cost

                                                                     =(95,000m2-99,000m2) x £5

                                                                      = £20,000 Favourable

Part B

Overall there Is a total of £101,000 extra expense. We can not solely make production manager for it . because the cotton price in the market has increased by 20 % due to which adverse material price planning is very high i.e, £95,000 A, also the design is changed by the customer which is not under the control of the manager. The manger can be held responsible for the difference between market price and actual price and here the market price is £6 and the actual price is £5.8 which is lower by £.20 so the manager performed very well.

Part C

The use of planning and operational variances is very essential as well as needed for the organization. Due to Planning variances, the organization can do an appraisal of managerial skills and due to operational variances, the organization can control the raw material usages of the production unit.