Management Accounting

Table of contents Introduction 2 Discussion 2 Costing method & purpose of variance analysis 2 Key findings 3 Material price variance 3 Material usage variance 3 Labour rate variance 4 Labour efficiency variance 5 Variable overhead variance 5 Fixed overhead expenditure variance 6 Fixed overhead volume variance 6 Variable selling and distribution variance 6 Sales variance 7 Responding to publicity 7 Conclusion 8 Appendix 1: Key findings of variance analysis 9 Appendix 2: Profit Magin, Mark-up and sector information 10 References 11

Introduction This report provides information regarding the method used by Merinos Ltd. in costing their new ‘Belma’ overcoat. A variance analysis was carried out and the report looks at the importance and purpose of such an analysis. This report will pay particular attention to the key findings from the variance analysis, giving possible reasons and implications due to the variances. This is followed by a review of the profit margin for the product and suggestions on responding to the recent publicity on the ‘Belma’ overcoat.
Discussion
Costing method & purpose of variance analysis Merinos Ltd. uses absoprtion costing to cost their overcoats, which means that all of the manufacturing costs are absorbed by the units produced. In the case of ‘Belma’ overcoat this means that cost of a finished overcoat will include direct materials (e.g. leather), direct labour (e.g. skilled labour), and both variable and fixed manufacturing costs (e.g. rent). Non-manufacturing costs are considered as period costs, which are costs usually associated with selling

References: 2 Colin Drury (2006) 4 Colin Drury (2006)