Robert Jordan recently joined Larkhill Products Limited as a product manager. The company manufactures, distributes and sells a range of popular card games. At the end of his first month in post, Robert received the following statement from the management accountant.

Robert left school at the age of 18 with a couple of GCE Advanced Level passes. He had started his career promoting double glazing for a local company before moving into selling central heating systems. He was good at persuading people to buy and for the first ten years of his career he rarely stayed in one job for longer than two years. His ability and experience enabled him to gain promotion to more senior positions in sales and marketing. 

He was never interested in going to college or university and he was far too busy to think of studying part-time for some sort of qualification. When he joined Larkhill he knew a great deal about selling but little about the other functional activities of the company, e.g. accounting, distribution, human relations and production. His interview had not been handled particularly well but Robert was good at dealing with people so he had been able to give the impression that he had a wide knowledge of business. 

Robert panicked when he received the management accountant’s statement. What was it? What did it mean? What was he supposed to do with it? Dare he ask anybody to help him? 

After thinking about the problem overnight he decided to tackle it head on. The next morning he telephoned Dave Ellis, the management accountant. Robert was very authoritative and at the same time apologetic. ‘Sorry about this, Dave,’ he wheedled, ‘as you know, I’m new here and my other companies had different ways of doing things. I’d appreciate it if you would do me a position paper about the monthly variance report.’ He then indicated in more detail what he wanted. Dave agreed to supply him with some more information. 

Robert was pretty sure that he had not convinced Dave about the reason why he wanted a ‘position paper’. Nevertheless, he was confident that charm and warm words would see him through an embarrassing problem – as it always had. 

Required:

Prepare an explanation for Robert Jordan, explaining what the monthly variance report means and what action is needed.

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Sales volume Production volume Sales Direct material Direct labour Contribution Fixed costs Profit/(loss) *3 DLH x £4. Larkhill Products Limited Monthly variance report: January 2018 Original budget Flexed Actual Quantity budget Per unit Units 20 000 20 000 £ £000 800 40 18 360 12* 240 30 600 10 200 150 50 Units Units 18 000 18 000 18 000 18 500 £000 £000 720 648 324 360 216 270 540 630 180 150 30 Price variance variance £000 £000 72(A) 45(F) 81(A) 90(F) 144(A) 135(F) 225(A) - 18 140 10(F) (122) 135(F) 287(A) Total variance 2 000 (A) 1 500 (A) £000 72(A) 36(A) 54(A) 90(A) 162(A) (10)(F) 152(A)