Management Accounting - Assigment 2

MANAGEMENT ACCOUNTING
(Assignment 2)

Prepared for:
Mr. Jun Alejo Bathan
--Banking Academy, Hanoi--

Prepared by:
B&G Group
Maria - Trần Thị Hà My
September – Tran Bich Phuong
Aurora – Nguyen Que Anh
Mary – Vu Thi Huong
Tony – Mai Quoc Trung

6th, February 2011

1


EXECUTIVE

According to the American Accounting Association - “Management Accounting includes the
methods and concepts necessary for effective planning, for choosing among alternative business
performances”
In this assignment, my group had to work as well as an management accounting of a group of
companies. We need to fulfill all task from the managing director to explore the possibilities of
introducing appropriate budgeting methods is one of the operating companies. Base on the
information which is given in the scenario, this report will cover the following tasks:
•

Explain the purpose and nature of the budgeting process which should normally be taken

in the preparation of budgets in a manufacturing company.
•

Select appropriate budgeting methods for the organization and its need.

•

Prepare budget according to the chosen budgeting method.

•

Prepare a case budget.

•

Calculate variances, identify possible causes and recommend corrective action.

2


Contents

3


INTRODUCTION
Today economic activities are complex and diverse. The market is wide and competition
becomes cut-throat. Hence the mere ascertainment of cost is of little use, as provided by cost

accounting. Besides, the modern management is interested in not only knowing the cost of
production, but also in controlling the costs. It is possible only if the management is in a position
to determine financial cost, managerial performance, planning etc., and this gave birth to
“Management Accounting”. Hence, new techniques were invented to present the accounts
periodically, not necessarily at the end of the year, before the management. Such accounts should
be prepared in such a way that the results could be easily compared with the budgeted data and
efforts be made to exercise control. Such new techniques were termed as “Management
Accounting”.
This report will go on to deal with budgetary planning and control, preparing forecasts and
budgets and then comparing them to the actual results. Through this report, it can easily to see
the differences between costing and budgetary systems and will discuss the resulting of
variances.
After finish all duties in this assignment, all members in our group can learn many thing, and
improve our personal skills. We known how to work with numbers in accounting, how to
calculated costing and budgeting, ect. But sometime we get some problems such as calculate
wrong, miss understand the guideline, and to solve them our group need to gather do it again in
carefully way or ask our friend. After long process we work together with this assignment, all of
us are try our best, so we hope will get good feed back as well as advice from you to help us
improve more and more.

4


MAIN BODY
III.

Prepare forecasts and budgets for a business.

1. Explain the purpose and nature of the budgeting process.
a. The purpose and benefits of a budget

Department managers in a business make decisions every day that affect the profitability of the
business. In order to make effective decisions and coordinate the decisions and actions of the
various departments, a business needs to have a plan for its operations. Planning the financial
operations of a business is called budgeting. A business that does not have a budget or a plan will
make decisions that do not contribute to the profitability of the business because managers lack a
clear idea of goals of the business. A budget serves five main purposes—communication,
coordination, planning, control, and evaluation. The detail are:
COMMUNICATION
In the budgeting process, managers in every department justify the resourcesthey need to achieve
their goals. They explain to their superiors the scope and volume of their activities as well as
how their tasks will be performed. The communication between superiors and subordinates helps
affirm their mutual commitment to company goals. In addition, different departments and units
must communicate with each other during the budget process to coordinate their plans and
efforts. For example, the MIS department and the marketing department have to agree on how to
coordinate their efforts about the need for services and the resources required.
COORDINATION
Different units in the company must also coordinate the many different tasks they perform. For
example, the number and types of products to be marketed must be coordinated with the
purchasing and manufacturing departments to ensure goods are available. Equipment may have
to be purchased and installed. Advertising promotions may need to be planned and implemented.
And all tasks have to be performed at the appropriate times.

5


PLANNING
A budget is ultimately the plan for the operations of an organization for a period of time. Many
decisions are involved, and many questions must be answered. Old plans and processes are
questioned as well as new plans and processes. Managers decide the most effective ways to

perform each task. They ask whether a particular activity should still be performed and, if so,
how. Managers ask what resources are available and what additional resources will be needed.
CONTROL
Once a budget is finalized, it is the plan for the operations of the organization. Managers have
authority to spend within the budget and responsibility to achieve revenues specified within the
budget. Budgets and actual revenues and expenditures are monitored constantly for variations
and to determine whether the organization is on target. If performance does not meet the budget,
action can be taken immediately to adjust activities. Without constant monitoring, a company
does not realize it is not on target until it is too late to make adjustments.
EVALUATION
One way to evaluate a manager is to compare the budget with actual performance.Did the
manager reach the target revenue within the constraints ofthe targeted expenditures? Of course,
other factors, such as market and generaleconomic conditions, affect a manager’s performance.
Whether a manager achieves targeted goals is an important part of managerial responsibility.
The benefits of budgeting include:
•

Helps you gain control over finances. Budgeting helps you to acquire control over
indispensable and unnecessary expenditures whether they are at a huge business level or
family levels. It is the most effective means of getting rid of debts. Budgeting helps you
to adjust your expenses according to the needs and circumstances.

•

Keeps you informed. Personal budgeting helps you to know the exact amount of money
you possess. It is a self-education tool that keeps you informed about the allocation of

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your funds. A well made and kept budget helps you to continuously remind of your plans
and your gap with your goals.
•

Improves financial communication. Budgeting helps to open communication between
members of a family or partners in joint business when they sit together to discuss
financial issues through budgeting. Both for married couples and members of
organizations, who share financial resources and allocations, budgeting helps to make
decisions regarding areas where money has to be spenty. All members thus gain control
over finances.

•

Profitable tool. Accurate knowledge about personal monetary affairs provides so much
control in your hands that, you can take advantage of those opportunities that you might
have missed otherwise.

•

Helps you achieve definite objectives. A budget supports you in moving towards
financial goals. The most important thing to be considered before any budgeting is the
cause for creating a budget. This will help you to make a focused effort towards
achieving your tasks. A few of these tasks include; buying a house or luxury car for
yourself or opting for voluntary retirement when you feel the need of doing so.

Budgeting will help to organize your finances in such a way that you will readily have any
information whenever and wherever it is desired. Make budgeting, a part of your life and keep
financial worries at bay
b. Steps in the preparation of a budget
The preparation of a budget for any organization is a very important phase of the company. Each

year the budget is revised and also looked at. The reason for this is that the budget usually
outlines a framework within which the company can work. It also gives a broad framework to
identify if the company will have a profit or a loss and this in turn will help to reassess the goals
of the company and do appropriate changes in it.
There are various steps involved in the preparation of the budget and they are listed here:
• Estimate long and short term needs of the Company
The various long term needs also should be part of the budget. The main reason for the
formulation of the budget is due to the fact that the long term needs of the company should be

7


identified and the budget should try to lead the company toward the goal. Other than that, the
short term goals which are the planning for the immediate year should also be done at the time of
the budget.
• Calculate the income for the past year, present year and for the ensuing year:
The income of the company for the past and the present year should be compared. Various facts
should be taken into consideration and the person or the company should be able to calculate the
possible income for the next year too. This will again act as a guideline for the company to
function to try and achieve the immediate goals.
• Justify the estimated income and expenditures:
Budget is a time when the previous year’s income and the expenditure are assessed and the
justification for the income and also the expenditure is given, if there is a change in the income
that was forecast and the actual income generated. This will help to have accountability and also
for the people concerned to take the whole exercise of budget seriously.
• Estimate the costs:
The cost of various aspects is also to be estimated during the year. This will make it very easy for
the company to tackle any problems during the course of the year. Usually estimations during
budget time also leave a contingency fund that can be used to tackle any emergency need of

funds.
•

Set budget in accordance with the philosophy of the institution:
The philosophy of one institution varies from that of another institution. The philosophy could be
the allocation of funds for a specific cause which is the primary goal of the organization. This
should be kept in mind at the time of the budget.
• Request for sufficient funds:
Another important step in the preparation of the budget is that the financial management of the
company that makes the budget is that the financial management of the company that makes the
budget can also ask for a specific amount of money for them to tide over certain activities that
need to be done. The request for the funds can be made to the authorities concerned.
These are the various important steps of preparing the budget.

c. Preparing functional budgets

The preparation of functional budgets: A functional budget is the budget that is achievable and is
related to a specific unit or process or function or department of the organisation. It is a group of
related activities aimed at accomplishing a major service or program for which a unit of
government is responsible. A functional budget is prepare for a process of function.

8


At the outset a principal budget factor or limiting factor is identified. This determines scale;
examples include sales volume, available finance or productive capacity.
d. Cash budgets:

A cash budget is extremely important, especially for small businesses, because it allows a
company to determine how much credit it can extend to customers before it begins to have

liquidity problems.
For individuals, creating a cash budget is a good method for determining where their cash
is regularly being spent. This awareness can be beneficial because knowing the value of certain
expenditures can yield opportunities for additional savings by cutting unnecessary costs.
For example, without setting a cash budget, spending a dollar a day on a cup of coffee seems
fairly unimpressive. However, upon setting a cash budget to account for regular annual cash
expenditures, this seemingly small daily expenditure comes out to an annual total of $365,
which may be better spent on other things. If you frequently visit specialty coffee shops, your
annual expenditure will be substantially more.
e. Budgeted profit and loss account and balance sheet

A budgeted profit and loss account can be prepared from the data developed in:


Sales budget



Ending finished goods inventory budget



Selling and administrative expense budget



Cash budget

The budgeted profit and loss account is one of the key schedules in the budget process. It shows
the company's planned profit for the upcoming budget period, and it stands as a benchmark

against which subsequent company performance can be measured.

9


The budgeted balance sheet is developed by beginning with the current balance sheet and
adjusting it for the data contained in other budgets.
f.

Flexible budgets
A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. The
flexible budget is more sophisticated and useful than a static budget, which remains at one
amount regardless of the volume of activity.
If the plant manager is required to use more machine hours, it is logical to increase the plant
manager’s budget for the additional cost of electricity and supplies. The manager’s budget
should also decrease when the need to operate the equipment is reduced. In short, the flexible

budget provides a better opportunity for planning and controlling than does a static budget.
g. Cost estimation
An approximation of the probable cost of a product, program, or project, computed on the basis
of available information.
Four common types of cost estimates are:
•

Planning estimate: a rough approximation of cost within a reasonable range of values,

•

prepared for information purposes only. Also called ball park estimate.
Budget estimate: an approximation based on well-defined (but preliminary) cost data and

•

established ground rules.
Firm estimate: a figure based on cost data sound enough for entering into a binding

•

contract.
Not-to-exceed /Not-less-than estimate: the maximum or minimum amount required to
accomplish a given task, based on a firm cost estimate.

10


h. Computers and budgeting

Computer is tool for enterprises make a budgeting with many different software in accounting
nowadays.
For enterprises, the financial forecast is planning. Financial - is the process of calculating and
estimating the financial status of a future business activities. Business activities may be a
business, a new project, an investment plan, ...
According to BPP (2004,) functional budgets will be out of balance with each other and will
require modification so that they are compatible. The computer is helping the company to
process and store a totally larger volume of data so that’s using computer will help the company
to do the budget to manage their strategy.
In case of Francis Ltd, Computer and budget have the role of manufacturing and selling
company, therefore the budgeting process is daunting to say every least to make manual
preparation of a master budget and a cash budget in the real world. It totally needs a help of
computer to reduce time and effort of employees.

Adjustment plan and financial plan of the company every year is a key work for most business
executives. Even the end result of this financial plan is sometimes less important than the process
we perform the calculation and prediction. Because, in the process of preparing this plan you
also aware of the problems you will face in the future and identify yourself to a roadmap to go
forward.
i. Incremental and zero based budgeting system
Zero based budgeting (ZBB) is an alternative approach that is sometimes used particularly in
government and not for profit sectors of the economy. Under zero based budgeting managers are
required to justify all budgeted expenditures, not just changes in the budget from the previous
year. The base line is zero rather than last year's budget.
In traditional approach of budgeting, the managers start with last year's budget and add to it (or
subtract from it) according to anticipated needs. This is an incremental approach to budgeting in
which the previous year's budget is taken for granted as a baseline. This approach is called
incremental budgeting.

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Zero based budgeting approach requires considerable documentation. In addition to all of the
schedules in the usual master budget, the manager must prepare a series of decision packages in
which all of the activities of the department are ranked according to their relative importance and
the cost of each activity is identified. Higher level managers can then review the decision
packages and cut back in those areas that appear to be less critical or whose costs do not appear
to be justified.
Zero based budgeting is a good idea. The only issue is the frequency with which a ZBB review is
carried out. Under zero based budgeting (ZBB) ,the review is performed every year. Critics of
such type of budgeting charge that properly executed zero based budgeting is too time
consuming and too costly to justify on an annual basis. In addition, it is argued that annual
reviews soon become mathematical and that the whole purpose of zero based budgeting is then
lost. Whether or not a company should use annual reviews is a matter of judgment. In some

situations, annual zero based reviews may be justified; in other situations they may not because
of the time and cost involved. However, most managers would at least agree that on occasion
zero based reviews can be very helpful.
j. Budgeting performance and motivation
Performance budgeting: there is no consensus in the definition of performance budgeting.

However, there is agreement that at least there must be a link between the activity of an
institution and the size of its budget on order for us to talk of performance budgeting. For
instance the OECD defines performance budgeting as “a form of budgeting that relates funds
allocated to measurable results”. In addition performance budgeting sys-tem may be categorized
as to the strength of the link between performance information and funding, whether the funding
scheme is retrospective or prospective and whether activity is measured by output or outcome
indicators.
Likewise, performance budgeting schemes may be implemented in different ways across sectors
or even within a specific sector. For instance, the case mix system used in Danish heath care
sector is a form of performance budgeting with a fairly strong link between activity level and
funding. However in 2005 the system was implemented very differently in different regions.
Hence, in some counties 21% of the budget was linked to activity, while activity determined
71% of the budget in others. Likewise, in some countries the activity link was only implemented

12


between county and hospital, while in the others the link was also used at lower hierarchical
levels
Performance budgeting is most often introduced in order to increase activity, productive or
allocative efficiency note the different imple-mentations of performance budgeting schemes are
like to be determining for the effect of a specific scheme. Likewise, as note by Chistensen who
draws on the behavioral assumptions of Wil-liamson, any funding scheme that gives incentives
to organizations at the macro level is unlikely to be effective if it does not include incentives for

the individual decision makers that constitute organizations. The different implementations are
seldom adjusted correspondingly. The explanation might be that scholarly knowledge of the
significance of organizational setup and supportive incentive hitherto is sparse.
Source: ( />Source: ( />Source:( />
2. Select appropriate budgeting methods for the organisation and its needs.
3. Prepare budgets according to the chosen budgeting method.
A budget is nothing more than a written estimate of how an organization — or a particular
project, department, or business unit — will perform financially. If you can accurately predict
the performance of your company, you can be sure that resources such as money, people,
equipment, plant, and the like are deployed appropriately.
( />•

Production Budget:

The production budget calculates the number of product units to be produced, and are derived
from a combination of sales forecasts and the expected number of finished goods inventory to
have on hand.
( />•

Cost Centre Utilization Budget

A cost center is part of an organization that does not produce direct profit and adds to the cost of
running a company. In the future, Investments in public relations and customer service may
result in more customers and increased customer loyalty. Because the cost center has a negative
impact on profit, it is a likely target for rollbacks and layoffs when budgets are cut. Operational

13


decisions in a contact center, for example, are typically driven by cost considerations. Cost

center budgeting provides a further method of planning in addition to primary cost and secondary
cost planning. This tool enables you to carry out a comparison between actual postings and plan
budgets. You can thus determine when the budget is exceeded and carry out timely availability
checks.
( />•

Conversion Budget

By means of the budget, you can calculate how much you need to establish a business, how
much and need to run it. A budget issue for a number of entrepreneurs is probably the worst
problems at the beginning. They think that only fear can accounting budgeting. It is not true. The
budget is a fairly simple problem. It is just addition and division. Just take a cost.
So the changing in the bugdet can be helps the company to fix their budget that’s may have bad
affect for their business activities. From it, the companies will the plan to bring its more
development.
•

Material Budget

Direct materials budget is prepared after computing production requirements by preparing a
production budget. Direct materials budget or materials budgeting details the raw materials that
must be purchased to fulfill the production requirements and to provide for adequate inventories.
Preparing a budget of this kind is one step in a company's overall material requirements
planning.
( />•

Product Cost Budget

Production cost budgeting is basically the planning process for a firm's long time production
costs.

 It is very important for a manufacturing firm because:
 It helps in allocation of resources
 It helps in analyzing the profitability of the production activities
 It helps in analyzing the future cash flows from the production activities
 Return on investments.

14


•

Profit & Loss Account

A profit and loss account is a summary of business transactions for a given period normally 12 months.
 Shows business performance over a specific period of time
 Records incomings and outgoings to show whether a profit or loss has been made
 Shows a summary of invoices that have been raised, or sales income that has been

generated, including an estimate of work in progress but not yet invoiced
 Includes purchases made from suppliers for goods or raw materials, and an

estimate of cost for goods/raw materials used but not yet paid for
One of the important things to remember about a profit and loss account is that it does not
record whether invoices raised or received have been paid so it therefore does not indicate the
amount of cash your business
( />
15


Set the production budget, cost center utilization budget, conversion budget, materials

budget, product cost, profit and loss account budget:
Table: Production Budget

Production budgeted

Ref
Budgeted sales
Budgeted finished stock increase
Good finished output required
Good yeild from cost centre 15
Gross production needed from cost

(1)

Units F03
9,400
100
9,500(95%)
500(5%)

Ref

(2)

Units F04
12,200
400
12,600(90%)
1,400(10%)

centre 15
Good yeild from cost centre 14
Good production needed from cost

(3)

10,000
2,514

(4)

14,000
6,027

centre 14
Add increase in
WIP:

(5)

12,570
56

(6)

20,090
63

56=80%
63=70%

Summary of production budget
Cost centre 14
Cost centre 15

(7)

10,056
(8)

14,063

12,570
10,000

16

20,090
14,000


Table: Cost Centre Utilization Budget

F03

F04

Produce
units
Hours
Total

Produce
units
Hours
Total

Cost Centre Utilization Budget
Cost centre 14
12,570

Cost centre 15
10,000

1.2
15,084
20,090

0,9
9,000
14,000

0,4
8,036

1.5
21,000

Table: Conversion Budget.
Conversion Budget
£
Cost centre 14 (Variable + Fixed cost)

Variable costs (£6.50 per hour)
Fixed costs
Conversion cost
Cost centre 15 (Variable + Fixed cost)
Variable costs (£4.90 per hour)
Fixed costs
Conversion cost
Total

150,280
104,040
254,320
147,000
123,000
270,000
524,320

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Table: Material budget.
Material budget
Ref to
working

£

1
2

439,950
401,800
841,750

F03
F04
Total

Table: Product Cost Budget
Product Cost Budget
Ref
F03

Ref
£

Production cost based on 100
products
Material cost
Conversion cost centre 14
Variable
Fixed in total

F04
£

(1)

3,500

(2)

2,000

(3)
(5)

780
540
1,320
4,820
80 units
60.25

(4)
(6)

260
180
440
2,440
70 units
34.86

Cost at the end of centre 14
Yield of good units
Cost per good unit
Conversion cost centre 15
Variable
Fixed in total

(11)
(13)

Cost centre before
Cost at the end of cost centre
15
Yield of good units
Cost per good unit

(15)
(17)

(7)
(9)

352.8
295.2
648
4,820
5,468
76 units
71.95

18

(8)
(10)
(12)
(14)

(16)
(18)

514.5
430.5
945
2,440
3,385
63 units
53.73


Table: Profit & Loss Account
Profit & Loss Account
Ref
Sales production
Cost of sales
Production profit (unadjusted)
Opening stocks adjustment
WIP
FS
Production profit

F03
£
705,000
(676,330)
28,670

(1)
(3)
(5)

3,599
13,450
45,719

(7)

Ref
(2)
(4)
(6)
(8)

F04
£
817,400
(655,506)
161,894
2,311
22,038
186,243

4. Prepare a cash budget.
IV.

Monitor performance against budgets within a business.

1. Calculate variances, identify possible causes and recommend corrective action.
a. Calculate variances.
Variance analysis is the evaluation of performance by means of variances, whose timely
reporting increase the opportunity for remedial action. It helps management to understand the
present costs and then to control future costs. The value of variance analysis lies in managers
being able to isolate where increased costs are actually occurring and take remedial action in that
specific area.

19


Original

Flexible budget

Actual budge

800 units

950 units

950 units

£

£

£

64,000

76,000

73,000

12,000

14,250 (285 kg)

15,200

16,000

19,000(950metres)

18,900(920metres)

Skilled

4,000

4,750 (474hours)

4,628 ( 445 hours)

Unskilled

10,000

11,875( 1,484 hours)

11,275(1,375 hours)

Overhead

12,000

14,250

11,960

Operating profit

10,000

14,125

11,037

budget
Budgeted unit

Sales
Direct materials (RM)
Direct materials A
(RMA)
Direct materials B
(RMB)
Direct labor

Table: The table of original, flexible, actual budget.
 Working:
(1) Sales: x 950 = 76,000
(2)
•
•
(3)
•
•

Direct material:
Direct material type A: x £950 = £14,250
Direct material B: x £950 = £19,000
Direct labor:
Direct labor skilled: x £950 = £4,750
Direct labor unskilled: x £950 = £11,875

Prepare operating statement reconciling budgeted and actual results:
Budgeted profit

10,000

20


Sales
Volume

4,125 (F)

Price

3,000 (A)

1,125 (F)

Direct Materials A variances
Price

300 (F)

Usage

1,250 (A)

950 (A)

Direct Materials B variances
Price

500 (A)

Usage

600 (F)

100 (F)

Skilled direct labor variances
Rate

178 (A)

Efficiency

300 (F)

122 (F)

Unskilled direct labor variances
Rate

275 (A)

Efficiency

875 (F)

Fixed overhead variances

600 (F)

40 (F)

Actual profit

11,037

21

 Explanations:
• Sales:

Volume variances of Sales = 14,125 – 10,000 = 4,125 (F)
Price variances of Sales = 73,000 – 76,000 = 3,000 (A)
 The variance of sales = 1,125 (F)

•

Direct materials:

Direct materials A
Price variance = 15,200 – 310*50 = 300 (F)
Quantity variance = 310*50 – 14,250 = 1,250 (A)
 The variance of direct material A = 950 (A)

Direct materials B
Price variance = 18,900 – 920*20 = 500 (A)
Quantity variance = 920*20 – 19,000 = 600 (F)
 The variance of direct material B= 100 (F)

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•

Direct labor:
Skilled
Rate variance = 4,628 – 445*10 = 178 (A)

Efficiency variance = 445*10 – 4,750 = 300 (F)
 The variance of direct labor skilled = 122 (F)

Unskilled
Rate variance = 11,275 – 1,375*8 = 275 (A)
Efficiency variance = 1,375*8 – 11,875 = 875 (F)
 The variance of direct labor unskilled = 600 (F)

Actual profit = 10,000 + 1,125 – 950 + 100 + 122 + 600 + 40 = £ 11,037

b. Possible causes and recommend corrective actions.
It follows the causes of:
Direct material price
variances
The variance in the total
cost of materials on
account of a variation
between the standard price
that price of the materials
should
have
been
purchased and the actual
price at that the company
have been purchased.
Because of this variances
is on the amount of the
price being more or less
than the standard, the

Direct labour cost variances

Variable overhead variances

Direct labour cost variance is
the difference between the
standard cost for actual
production and the actual cost
in production.
• Labour Rate Variance
is
the
difference
between the standard
cost and the actual cost
paid for the actual
number of hours.
• Labour
efficiency
variance
is
the

Inflation can affect and distort
financial
information
is
recorded on the financial
statements
makes

the
calculation
and
analysis
becomes misleading. Such as
inflation will affect the value
of the cash flow at a, making
cash flow in different years
will have a different currency.
This makes the comparison
and analysis between the data
in any difference.

23


department responsible for
purchasing materials can
be held responsible for
this.
A material is an important
task in organizing the
material accounting. So to
calculate the cost of
materials is used to
measure the monetary
expression of value of
materials according to
certain
principles.

Storing materials in the
period of the business
involves a lot of different
input sources. Depending
on source input, but the
actual value of the
material in stock is defined
different.
materials inventory must
be based on company
characteristics on the
number of list points,
number of entries of raw
materials, qualifications of
accounting
personnel,
storekeepers, warehouse
conditions of business.
Because the price always
change day by day so its
affect to the company in
many aspects such as the
changing in transportation
costs and storekeeping
costs
can
also
be
contributing factors to
material price variance of

the company

difference between the
standard labour hour
that should have been
worked for the actual
number
of
units
produced and the
actual number of hours
worked when
the
labour
hours
are
valued at the standard
rate.
Can be easy to see that, the
salary of the new employees
in the company will be lower
than the older employees or
the employees who has much
experience will be have the
suitable salary with their
position. So it makes a
favorable labor rate variance.
Because the new employees
do not have much experiences
or knowledge about the

product such as their work so
they can work slower than the
other. From it, the company
will be create an unfavorable
labor efficiency variance.

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The seasonal factors also
affect the operations of the
company and made the
financial ratios tend to
fluctuate.
Such
seasonal
inventory to higher than
normal so if you use the ratio
of inventory turnover higher
than normal if the ratio using
the inventory cycle will see
the company seems to perform
poorly effective.
At present there is no uniform
consensus on the formula of a
number of indicators in the
books and documents on
financial statement analysis.
This makes comparison of
data was analyzed between the
different sources of potential

risks.


Recommend corrective action
To increase profits, companies can perform the following tasks:
•
•

Increased revenue: the effort but were subjective effects of objective factors.
Reduce costs to increase profits or increased costs to increase consumption:

•

reduce costs increase primarily due to the subjective effort.
Reduced price to increase competitive advantage: to reduce the price they must
reduce costs, mainly due to subjective effort.

Therefore, to increase profits managers must always interest in cost control:
•
•
•

Before spending: The consumable costs and planning costs.
While the company is spending: spending control to the norm.
After spending: Analysis of cost variation for the cause increase or decrease the search
cost saving measures

Company should analyze fluctuations of certain costs follows:
•
•

•
•

Analysis of volatile raw material costs directly
Analysis of changes in direct labor costs
Analysis of fluctuations of overall production costs
Besides, to be able to control all kinds of other costs, managers can conduct analysis of
the variation of inventory costs, selling expenses and administrative costs businesses and
so on.

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