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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 onlyI’m confused on this question . . I have made adjustments in the actual figures for the last year and then compared it with the actual this year. Like in the case of sales revenue , I got revised $36000 ( ie $40000 – 10%) , but the actual revenue is $28500 which should mean that performance of the manager is poor.
Again , one more question
The following statements have been made about planning and operational variances :
(1) Planning and operational variances are calculated when it is necessary to assess a manager on results that are within his/her control.
(2) revised stantards are required because variances may arise partly due to an unrealistic budget , and not solely due to operational factors
In the revision kit , the solution given is both (1) and (2). I think this is a mistake made in Kaplan due to printing error. So I just wanted to confirm whether option 1 is the only correct option
First question: We do not measure the managers performance by comparing the current year with the previous year. We measure by comparing the current year with the budget.
E.g They had budgeted on a selling price of 50,000/500 = $100 per unit.
The market say selling prices fall by 10% – which is outside the managers control – so it is reasonable to expect a selling price of $90 per unit. Therefore they should realistically have had revenue of 300 x $90 = $27,000. The actual revenue is higher, and so the manager has performed well.Second question:
There is no mistake and (1) and (2) are both correct. If the budget is wrong there is going to be a variance, but this is not due to operational factors (i.e. the manager doing things better or worse).Have you watched my free lectures? The lectures are a complete free course and cover everything needed to be able to pass the exam well.
Sorry , I mean for Question 2 option 2 is the only correct solution. Option 1 doesn’t seem to match with the fact that planning variances occur outside the control of the manager
True, but we still need to analysis the total variance into planning and operational variances in order to know what the operational variance is.
hmm.. I kind of understoodwhat you are trying to say .. but still I’m not satisfied with the answer
The main purpose of analysing the variance into the planning and operational variance is so that we know the operational variance and can then measure the manager on the (operational) factors within their control.
With basic (Paper F2) variances, we only look at the total variance and measure the manager on this, which is ‘unfair’ – that is why in Paper PM we go further and analyse the variance so as to be able to measure their performance on factors that they control.
Sir,here in total material cost how can we flexed the budget. In solution the material price when flexed is higher than budget whilst the external environment show that prices are reducing.
This question is not asking you to flex anything – it is not asking for calculations.
It is simply asking whether or not the two statements are correct.
Have you watched my free lectures on planning and operational variances?
Hi John i saw your lecture regarding this exercise ; september 2016 question 13 and I really don understand why we are giving as “well performance” that the company sold 25% of actual figures from last year , I thought we would need to flex the budget sales which was 500 units and then it would be poor performance as the 75% of 500 is 375 units ..
Can you explain please a bit further I have seen the answer in the paper by I really dont understand the rational to assess performance comparing by last year actual figures instead of flexed budget figures of the current year
Thanks again for all your effort
Regards
Jorge
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