Question

The packaged meal division of the Quick-Foods Corporation produces a variety of a packaged meals like Chicken Korma and Tikka Masala that are shelf stable at room temperature. The company is in its annual merit review process where individual, responsibility center as well as companywide performance is assessed.

Budget* Actual Budget Variance Sales $63,000 $65,800 2,800 Less operating expenses Advertising 9,600 9,000 600 Less production expenses Direct Materials 4,725 4,851 126 Direct labor 8,400 9,250 850 Variable Overhead 14,800 12,000 2,800 Rent on Equipment 4,600 4,000 600 Income from operations 20,875 26,699 5,824 * All variable costs have been flexed for the budget column

Last year when the packaged meal division (i.e. investment center) had a return on investment (ROI) target of 8% and an actual ROI of 8.2 percent, the company paid a yearend bonus of $250 to each employee in the division. This year due to anticipated economic growth in general, the ROI target was raised to 9.5 percent. The division has invested assets at the end of the year of $260,000.

Question: Complete the performance report, then speculate on a possible cause for each variance (except for direct materials and direct labor) and then suggest a follow-up action for those variances.

Answer 1

	Quick Foods Corporation
	Company wide Performance Assessment
	Particulars	Budget	Actual	Budget Variance
A	Sales	63,000	65,800	2,800
	Less : Operating Expenses
	Advertising	9,600	9,000	600
	Less : Production Expenses
	Direct Materials	4,725	4,851	(126)
	Direct Labor	8,400	9,250	(850)
	Variable Overhead	14,800	12,000	2,800
	Rent on Equipment	4,600	4,000	600
	Total Production Expenses	32,525	30,101	2,424
B	Total Production & Operating Expenses	42,125	39,101	3,024
C	Income from Operations	20,875	26,699	5,824
D	Invested Asset	260,000	260,000
E	ROI=C/D=	8.03%	10.27%
F	Target ROI	9.5%	9.5%

Observations and speculations on possible reasons of Variance:
If we see the ROI, the actual ROI has beaten the target , however there are
some considerable savings in overhead related expenses that have
mainly contributed to the better performance.
1. Advertising Variance : There is a $600 positive variance. It may be from two
factors . One , the actual rate negotiated with advertising agency was better than
estimated and the company succeeded to get more discount.
or, the company did not use full budget as there was already a good response
from sales team and the marketing team did not do further push for some
scheduled advertising campaigns as budgeted.
Follow Up Action : The actual reason for the variance need to be ascertained.
If it is due to better rate negotiation , then that will be good and efforts should be made
to optimize the Advertising cost by selecting the most impactful media with
best ROI . If there is unspent Budget, it needs to be investigated if that could
have been utilized to generate more sales and attention should be raised to it.
2. Variable Overhead : There may be process improvement and better quality
checks on indirect materials that led to saving s in some overhead. Also a
better preventive maintenance schedule might have saved some maintenance cost,
so improvement in equipment running or standard operating practices might
have resulted in lower consumption of utilities like power and heat. All those factors
might be responsible for a good saving in Variable overhead.
Follow Up : This is a good example of operational efficiency. Management must
encourage such savings initiatives and take up such initiative at all possible levels
of the company.
3. Saving in Equipment Rent : This is unusual , but it may happen that
the rental contact was renewed at a lower rate than the budgeted rate
and that resulted in the savings .
Follow Up : The actual reason for the variance need to be investigated and
if it is due to better negotiation like advertising contracts , management
should take these as examples and aim for reviewing all contracts and aim
for some savings of such type.