Variance Analysis of Overhead Costs & Performance Measures for MA Plc

Variance Analysis of Overhead Costs

MA Plc provides online educational services to their clients in the higher education sector. The company offers its products in a package which includes online courses and supporting materials for follow up reading and self-paced practices

In the recent years, the company has experienced rapid growth rate and is operating beyond its initial expansion plans. While the management is excited about the growth, it is also concerned about the rising operating costs, particularly the overhead costs. The company operates a standard costing system and all departments are required to participate in the system. The current company policy is to allocate production overheads using the direct labour hours. As the management accountant in the company, you have gathered the following information about the planned overhead costs and the actual amount incurred, as follows:

Planned information for the period under review:

a.To complete 8,500 packages

b.Standard direct labour hours is 8 hours per package

c.Variable overhead costs was expected to be �54,400

d.Fixed overhead costs was expected at �136,000.

Actual information for the same period:

a.Completed 8,700 packages

b.A total of 82,650 direct labour hours were used

c.Variable overhead costs incurred recorded at �59,508

d.Fixed overhead costs incurred amounted to �133,893.

You are getting ready to analyse the information gathered, and have informed the management that you will be presenting the variance analysis in the forthcoming management meeting. However, some members in the management seem skeptical about the value of such analysis. They feel that maintaining a standard costing is in itself problematic and hindering the company from adopting modern management approaches, such as pursuing continuous improvement and being creative with products and processes. In fact, the management is in the midst of considering implementing some quality management initiatives to ensure that, albeit the rapid expansion, it will continue to provide quality services to its customers.

Meanwhile, the company realises that, in addition to analysing cost variances, management also needs to determine and evaluate the overall financial performance that has been achieved.�

Required

(a) Following the company�s concern about its rising operating costs, determine the following overhead cost variances:

(i) Variable overhead expenditure variance

(ii) Variable overhead efficiency variance�

(iii) Fixed overhead expenditure variance�

(iv) Fixed overhead volume variance�

(v) Fixed overhead volume capacity variance�

(vi) Fixed overhead volume efficiency variance

(b) Based on the above analysis, discuss whether the company�s concern on the rising costs is valid.�

(c) Drawing upon the literature, discuss the fitness of the current budgetary control practice in MA Plc, i.e. using standard costing system and variance analysis, in supporting the quality management initiatives that the company is planning to put in place

(d) The following information has been gathered for the year ended 31 December 2020.�

The company has invested �80,000 in developing a new market segment. According to the market survey, this investment can generate economic benefit over a four-year period beginning year 2020.�

The company uses a weighted average cost of capital of 12%. It has set the performance targets for the year ended 31 December 2020 as follows:�

Return on Investment (ROI) 20%

Residual Income (RI) �66,000

Economic Value Added (EVATM) �110,000�

(i) Calculate the ROI, RI and EVATM for the year under review and interpret the results.

(ii) Provide a brief discussion on the usefulness of above performance measures to the management.