- 30 Marks
PM – May 2019 – L2 – Q1 – Standard Costing and Variance Analysis
Analyze variances, reconcile budgeted and actual profit, and evaluate pricing strategy success for KK Plc.
Question
KK Plc. buys small tablet computers which it customizes for the Nigerian market and then resells to electronics retailers. Although a detailed variance analysis is carried out each month, the CEO John, T, has become concerned that no one has a clear responsibility for taking action in response to this analysis or for using it to carry out an ex-post analysis of the outcome of important decisions.
The following is an extract from last month’s budget:
| Model | A | B | C |
|---|---|---|---|
| Selling price/unit (N) | 1,000 | 1,250 | 1,500 |
| Variable cost/unit (N) | 400 | 500 | 600 |
| Sales (units) | 25,000 | 40,000 | 15,000 |
The budgeted fixed costs were N12,500,000 for the month, which were not dependent on the mix or quantities of products sold. When the budget was being prepared, it was estimated that the total size of the market (including sales by the company and the competitors) would be 400,000 units.
Shortly after the beginning of the month, the marketing director, Okon Nelson, decided that a change of pricing strategy was necessary in response to the recessionary economic conditions. The price of Model A was reduced by 10%, and the prices of Models B and C were each reduced by 20%. The company was partly successful in passing on the impact of these price reductions to its suppliers, and as a consequence, the variable cost per unit for all three models was reduced by 5%. Actual fixed costs were 5% higher than budgeted because of the marketing costs associated with publishing the price reductions.
As a result of the recessionary conditions, the actual total market size was just 200,000 units. The actual quantities sold by the company were as follows:
Actual quantities sold by the company were as follows:
| Model | Sales (units) |
|---|---|
| A | 14,800 |
| B | 29,500 |
| C | 11,700 |
Required:
a. Present a comprehensive analysis of variances, reconciling the budgeted and actual profit for last month in as much detail as possible from the information provided. (25 Marks)
b. Evaluate the financial success (or otherwise) of the decision to change the pricing strategy and assess whether the difference between the budgeted and actual performance was attributable mainly to luck or to factors within the company’s control. (5 Marks)
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