Amber Textiles Limited is a small textile processing company based in Burnley in Lancashire. It is one of the few remaining such companies in the United Kingdom but it too is struggling to survive as a result of intense competition from the Far East.

The board of directors has been well aware for some time that if the company is to continue in business, it must retain its customer base by being extremely competitive. There is little scope to increase selling prices and so costs have to be controlled extremely tightly.

The Board has done everything possible to do so. It had recently introduced for example an ‘information for management’ (IFM) system. The system involves using budgets for control purposes but it also produces standard costs for each of the company’s main product lines. A firm of management consultants installed the system with the assistance of the company’s small accounting staff.

The new IFM system seemed to involve an awful lot of paperwork and Ted Finch, the managing director, was struggling to cope with the sheer volume of reports that mysteriously appeared on his desk almost every day. By profession, Ted was a textile engineer. He had little training in numerical analysis and none related to accounting. 

One morning, shortly after the new system was up and running, he found the following statement on his desk.

Ted studied the statement carefully. What was it? How had it been produced? What did it mean? What was he supposed to do with it?

He was still somewhat puzzled after studying it for some time so he decided to telephone the management consultants responsible for installing the IFM system. They referred him to a manual that they had prepared, a copy of which lay untouched on top of Ted’s bookshelf. Sure enough the manual contained an explanation and an example of a ‘standard costing operating statement’. 

After studying the relevant section, Ted felt a little more confident about what he was supposed to do with the standard cost operating statement. Nevertheless, he thought that it might be useful to take some advice so he contacted his chief accountant and asked him to prepare a written report reviewing the statement. He stressed that he wanted to know precisely what action he should take (if any) to deal with its contents. 

Required:

(a) Prepare the section of an Information for Management manual dealing with standard cost operating statements. The section should include an outline of the nature and purpose of such a statement, an explanation of its contents and the action management should take on receiving it.

(b) With regard to the specific standard cost operating statement for the four weeks to 31 March 2017, prepare a report explaining what the data mean, what interrelationship there may be among the variances, and what specific action Ted Finch might expect his line managers to take in dealing with it.

(c) Outline what additional information might be useful to include in a standard cost operating statement.  

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Period: Four weeks to 31 March 2017 Budgeted sales Budgeted cost of sales. Amber Textiles Limited Standard Cost Operating Statement Sales volume profit variance Budgeted profit from actual sales Variances Sales price Direct material price Direct material usage Direct labour rate Direct labour efficiency Variable production overhead expenditure Variable production overhead efficiency Fixed production overhead expenditure Fixed production overhead volume Actual profit £ Favourable 6 700 15 400 20 800 2600 12 000 57 500 £ Adverse 20 000 17 600 3 140 30 000 70 740 £ 700 000 (490 000) 210 000 17 600 227 600 (13 240) 214 360