The case study for this chapter brings together all the different variance calculations in a comprehensive example.

Andrea Ellison is managing director of Francis & Follett Limited, an unlisted company that manufactures wooden bedframes. After a few difficult years in the last decade the company has managed to secure half a dozen contracts with major home furnishings retailers. This has significantly expanded the volume of trade and has allowed the company to repay its long-term loans. The company's accountant and business adviser suggested last year that it is now time to improve the quality of management control systems. Andrea and her brother, Phil, the sales director, are the two active directors in the business. In the past they have been able to keep tight control over the business by close supervision. However, as the business has taken on more staff, that kind of control has lessened.

Factory supervision is now under the control of a production manager, Faroukh, who was promoted to this position after several years as senior supervisor. The purchasing and stores function is managed by Perry, who has also been a trusted employee for many years.

A few months ago Andrea and Phil appointed a management accountant, Sylvie, who has worked hard to establish a budgetary control system In time for the start of the new financial year on 1 January 20X4. Sylvie has carefully monitored the production process with the help of Faroukh, and has established standard costs and times for all parts of the process. The annual budget is split into 12 monthly budgets, and actual performance is monitored each month. It is now the end of March 20X4 and the new system has been in place for three months.

The budget for March 20X4 is as follows:
£
Sales: 1 600 units X £103 164800 Costs Direct materials: 1 600 units x (12 metres x £2,50 per metre) (48 000)
Direct materials: 1 600 units x 1 bag of metal components x £4.50 (7 200)
Direct materials: 1 600 units x 1 packaging box x £3.50 (5 600)
Direct labour: 1 600 units x (2,5 hours x £6.00 per hour) (24 000)
Variable production overheads: 1 600 units x (1.5 machine hours per unit X £4) (9 600)
Fixed production overheads: 1 600 units x (1.5 machine hours per unit X £10) (24000)
46400 Selling and administration overheads (16 600)
Net profit 29 800 The pieces for each bedframe are flat-packed in the factory. Each pack contains the necessary metal components for assembling the bedframe. Francis & Follett Limited buys in the components ready packaged in plastic bags.
Production overheads are absorbed on the basis of machine hours. Machine hours for March are budgeted at 2400 hours. Actual figures for March are as follows:
£
Sales: 1 650 units x £103 169 950 Costs Direct materials: 1 650 units x (12.2 metres x £2.70 per metre) (54 351)
Direct materials: 1 650 units x 1 bag of metal components x £4.50 (7 425)
Direct materials: 1 650 units x 1 packaging box x £3.50 (5 775)
Direct labour: 1 650 units x (2.4 hours x £6.00 per hour) (23 760)
Variable production overheads (10 050)
Fixed production overheads (23 960)
44629 Selling and administration overheads (16420)
Net profit 28 209 The answers to many of the exercises are set out later in this chapter. However, where the exercise number is followed by 'A' the answer is available only to lecturers. Remember that additional exercises (with answers) are available to students on the book's website.