This report is briefly writes about the best way of using the method to calculate the cost and the variance analysis for Incognito Ltd. There are two costing method which are absorption costing and marginal costing, choose one of the best costing method for Merida costume set, that would improve the company's perform and decision-making. Incognito Ltd's managing director worried that internet has a negative effect on high street figure and he wanted to improve the company's performance and profitability. This report would analysis the data from the reconciliation budgeted statement and the future decision to improve Incognito Ltd's performance.
Incognito Ltd should use absorption costing method to cost the Merida costume set because absorption costing giving the full costing for the production. This method expensing all the cost related to manufacturing of the product. It's included the use of total direct costs and total of overhead costs as cost base. The difference of absorption costing and marginal costing are, absorption costing treated fixed manufacturing overhead as product costing and marginal costing treated fixed manufacturing overhead as period costing. Most company believed that products cannot be produced without the resources provided by fixed manufacturing overheads for absorption costing. Absorption costing is giving a higher value closing stock. Absorption costing method is used for external use, used for preparing the financial accounts. It shows lesser fluctuation in net profit and release to public to see their performance in sales. Furthermore, absorption costing is better in avoiding the fluctuation of profit being reported in marginal costing.
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Variance analysis is means the analysis of the company's performance from each cost variance. For the purpose of variance analysis, it used to promote management action at the earliest period. They analysis all the performances for the whole year time and make discussion and decision-making for the future to increase the company's profitability. As in business, variance analysis could control company's device. Furthermore, after the standard cost has been set, the manager could compare with the actual result against the budget, so that the manager could clearly understand in the review of procedure and make a suitable decision. It's examining the detail of each variance between actual and budgeted cost to determine whether was performance were not met. In addition, variance analysis provides a framework for managers to make decision of breaking down or improve the overall performance of a company.
For September to November 2012, we used 10 variances of cost to make a better decision making for the months. Firstly, one of the variances is sales price variance. It is difference between actual selling price per unit and the budgeted selling price per unit and multiplied by the actual number of units sold. From the calculation, we calculated the sales price variance for September, October and November is total of £29240 adverse. We can see that the actual price is lower than the standard price that causes an adverse of variance. It shows that the company did not put more effort on advertising the product. Also, the company would be affected by general economic conditions and the actions of competitors. Secondly, is the sales margin volume variance. Definition for this variance is the difference between the budgeted quantity of units sold and the actual quantity of units sold, and multiplied by the profit per unit in margin. For this variance, we found there is a total of £1545 adverse for the three months. The reason why it is adverse is because the actual quantity sold is lesser than budgeted quantity sold. As the reason, company should put more effort in promoting the Merida costume set to increase the sales and makes profit. On the other way, managing director strongly believes that children's clothing will offer a more stable return, but the Merida costume set is not interested for children, so the company should change the operating that strongly offence on children's market.
Furthermore, material price variance is also one of the variance analysis. It is the difference between budgeted price per unit of material and the actual per unit of material, multiplied by actual quantity of material used. As in business, the company has calculated for each material for Merida costume set which are satin fabric, velour fabric, sequins, polyester yarn, metal hoops, velcro and metal poppers. The result for each material variances are £1343.16 favourable, £509.22 adverse, £888 favourable, £1992.60 favourable, £1107 favourable and £191.88 favourable respectively. From the calculation, we can clearly see that all of the material price variance are favourable expect velour fabric is adverse. Material price variance is favourable which means that the material was purchased of amount is lesser than budgeted. On the flip side, adverse amount of material price variance is means that more estimated price is paid, as per unit. Some of the reason that causes material price variance are there might be some changes in purchase price of material and due to some substitute raw material. Moreover, cash discount and changes in transportation cost also could apply as reason. Next is the material usage variance which is mean the difference between the actual quantity of materials used in production and the standard quantity of materials allowed for actual production, multiplied by the standard price per unit of material. From the calculation, it indicates that satin fabric got £1018.44 adverse, velour fabric got £1239.84 favourable, sequins got £24 adverse, polyester yarn got £3321 adverse, metal hoops is £0 and velcro got £797.04 adverse. Except the velour fabric, others of material used to produce the Merida costume set are more than budgeted, which indicates that bigger size of product that are produced is needed more material to produce.
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Furthermore, labour rate variance is also need to be calculated for variance analysis. It means the difference between standard labour rate per hour and actual labour rate per hour, multiplied by labour hours worked. In the result, there is an amount of £2878.20 adverse for skilled labours, and £590.40 adverse for semi-skilled labours. The reason why there is an adverse for skilled labour is because the actually rate of pay has exceeded the budgeted rate. Skilled workers with high hourly rate of pay may be given some duties. There is also a variance of labour efficiency. The meaning of labour efficiency variance is the difference between the standard labour hour for actual production and actual labour hours worked, multiplied by standard labour rate per hour. From the result, we can see that there is £22509 adverse for skilled labour and £6346.8 favourable for semi-skilled labour. The adverse labour efficiency variance may be due to the use of an inappropriate standard that should be change.
In additional, variable overhead rate variance has been taken into account. This variance is calculated from the difference between standard rate and actual rate per hour, multiplied by actual hours worked. There is £420.66 adverse which means there is a change of £0.03 of variance cause this adverse. Furthermore, variable overhead efficiency variance also has been taken into account. This means the difference between standard hours for actual production and actual hours worked, multiplied by standard rate per hour. It shows £166.05 of adverse which means the actual hours worked is more than budgeted of £1107.
Next, there is also fixed overhead variance that brings into account. There are two fixed overhead variance which are fixed overhead expenditure variance and fixed overhead volume variance. Fixed overhead expenditure variance is means that the budgeted fixed overhead minus the actual fixed overhead. From the result, there is £3372.5 adverse for the total of 3 overheads, which are supervisor's salary, rental and utilities. It's incurred by the increase of actual fixed overhead. One of the reason is the fixed overhead of rent of the premises has increased. On the other hand, fixed overhead volume variance is means the difference between the amount of fixed overhead actually applied to produced goods based on production volume, and the amount that was budgeted to be applied to produced goods. The total for 3 overheads of fixed overhead volume variance is £208.8 adverse which means the actual standard hours recovered is lesser than budgeted. The total of fixed overhead recovery rate per hour is £1.74 for the 3 fixed overheads. Lastly, are the postage and packaging variance. From the analysis, it indicates that the budgeted cost per unit is £3.95, but the actual cost per unit is higher than the budgeted, £4.1 per unit. After all, we calculated £1096.5 adverse for the postage and packaging which are calculated from the higher price of actual per unit minus the budgeted per unit.
As what we got the information for the current profitability for Incognito's Ltd, the total of £292034.5 is the revenue and sales. Also, we got our actual profit as £6265.825. However, compared to the sector of Burberry Group PLC, they got 7.84% of net profit margin. As in Incognito Ltd, the net profit margin of the company is 2.15%. From this two net profit margin, it indicates that Burberry Group PLC has a higher percentage of net profit margin compared to Incognito Ltd. To increase the profitability as high as Burberry Group PLC, I advise that our company should cut cost for the costume set, try to get a lower price of material or substitute material. It can be also renegotiate what we spend on material and to get some discount or bonus to reduce the cost. This would keep maintaining strong business to business relationship. Furthermore, we can also reduce all the unnecessary expenses. Aim for a specific market is also one way of increase the profitability. As company's managing director says that children's market will offer a more stable return. If the Merida costume set is built in children's market, it would get a higher return than the current market.
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