Question

In: Accounting

Linenpress Limited manufactures pillowcases which it supplies to a major hotel chain. It uses a just-in-time...

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.

Solutions

Expert Solution

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.


Related Solutions

A large hotel chain buys its cleaning supplies in bulk from a national vendor.  The hotal purchasing...
A large hotel chain buys its cleaning supplies in bulk from a national vendor.  The hotal purchasing manager currently orders a multi-purpose cleanser used to  clean the guest bathrooms in quantities of 6,000 gallons at a time.  She is considering changing the order quantity to the EOQ.  The manager has collected the data in the table below.  Use the data to answer questions a-d below.  The hotel is open 365 days out of the year. Inventory Information for Shower Cleanser The Cost of a Gallon of...
Amy Richardson had been a well-paid sales manager of a major hotel chain for 15 years....
Amy Richardson had been a well-paid sales manager of a major hotel chain for 15 years. Due to a hotel owner's illness, Amy was offered the opportunity to purchase a hotel near a seaside vacation area she had often visited. After obtaining a lawyer and a financial accountant to assist her, Amy did an analysis of the most recent financial statements of the hotel. Since the hotel had consistently shown a profit during the past few years, Amy thought that...
Amy Richardson had been a well-paid sales manager of a major hotel chain for 15 years....
Amy Richardson had been a well-paid sales manager of a major hotel chain for 15 years. Due to a hotel owner's illness, Amy was offered the opportunity to purchase a hotel near a seaside vacation area she had often visited. After obtaining a lawyer and a financial accountant to assist her, Amy did an analysis of the most recent financial statements of the hotel. Since the hotel had consistently shown a profit during the past few years, Amy thought that...
Amy Richardson had been a well-paid sales manager of a major hotel chain for 15 years....
Amy Richardson had been a well-paid sales manager of a major hotel chain for 15 years. Due to a hotel owner's illness, Amy was offered the opportunity to purchase a hotel near a seaside vacation area she had often visited. After obtaining a lawyer and a financial accountant to assist her, Amy did an analysis of the most recent financial statements of the hotel. Since the hotel had consistently shown a profit during the past few years, Amy thought that...
Logestics Management Ch7 "Just-in-time and the agile supply chain" Based on this chapter answer the following....
Logestics Management Ch7 "Just-in-time and the agile supply chain" Based on this chapter answer the following. Assess the reasons for using lean thinking (suitable examples), what are the benefits from Suppliers to end users?
Logestics Management Ch7 "Just-in-time and the agile supply chain" Based on this chapter answer the following....
Logestics Management Ch7 "Just-in-time and the agile supply chain" Based on this chapter answer the following. Discuss major types of Waste, companies has to keep in mind during production.
Logestics Management Ch7 "Just-in-time and the agile supply chain" Based on this chapter answer the following....
Logestics Management Ch7 "Just-in-time and the agile supply chain" Based on this chapter answer the following. Why Companies adopted Lean Thinking and JIT model?
12. If _________ is/are approved, the President has a limited time in which to complete trade...
12. If _________ is/are approved, the President has a limited time in which to complete trade negotiations, and Congress must vote up or down on the negotiated agreement within 90 day legislative days of submission, The escape clause Safeguards Trade promotion authority (fast track) Trade remedy laws 13. All of the following countries are part of the TPP except Peru Vietnam China Australia 14. If processing occurs at different stages in production, it is considered A) Vertical trade whereby traditional...
XYZ hotel uses approximately 200 towels daily. It operates 250 days a year. Assuming, lead time...
XYZ hotel uses approximately 200 towels daily. It operates 250 days a year. Assuming, lead time is normally distributed with a mean of 2 days and a standard deviation of 0.5 day. The management desires 90 percent service level. Annual carrying costs is $0.8 per towel, and ordering costs is $20. Given the production rate for the towel = 600 towels per day. Determine the optimal order quantity? Determine Safety Stock? The sales people have recently told the top management...
1. If a firm uses just-in-time inventory system what effect is that likely to have on...
1. If a firm uses just-in-time inventory system what effect is that likely to have on the number and location of suppliers? (200words) 2. Why might a firm keep a safety stock? What effect is it likely to have on carrying cost of inventory? (200words) 3. Why would a financial manager want to slow down disbursements? (200words)
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT