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A profit centre manager claims that the poor performance of her division is entirely due to factors outside her control. She has submitted the following table along with notes from a market expert , which she believes explains the cause of the poor performance :
Category Budget this year Actual this year Actual last year
Sales volume(units) 500 300 400
Market expert notes : The entire market has decreased by 25% compared to last year.The product will be obsolute in four years.
Sales revenue $50000 $28500 $40000
Market expert notes: Rivalry in the market saw selling prices fall by 10%
Total material cost $10000 $6500 $8000
Market expert notes: As demand for the raw materials is decreasing , suppliers lowered their prices by 5%.
After adjusting for the external factors outside the maanger’s control , in which category / categories is there evidence of poor performance?
A. Material costs only
B Sales volume and sales price
C Sales price and material cost
D sales price onlyThe correct option is A
Dear Sir,
Can you please tell me how sales volume was not a poor performance by manager
As the market had declined by 25%, the flexed volume should be 500 -25% ie 375units
As he sold only 300 units he poorly performed in volume as wellGiven that the market had fallen by 25% from last year we would expect our sales to fall by 25% from last year.
Given that our sales last year were 400, a fall of 25% would mean sales this year of 300. Given that we have sold more than 300 it is not poor performance by the manager.
We didnt we compare this year’s actual results with the flexed budget and flexed last years actual results?
As in planning variances, we flex the budgetGiven that the question says that the market has fallen by 25% since last year, the budget was clearly unrealistic and therefore comparing with the budget is not measuring the managers performance. Now we know that the market was 25% less than last year we should revise the budget to 25% less than last year (which is effectively a planning variance). The operating variance (which is what measures the managers performance) is comparing the actual figures with the revised budget figures.
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