Advanced: Reconciliation of budgeted and actual profit including operating and planning variances plus an inter·

pretation of the reconciliation statement Casement ltd makes windows with two types of frame: plastic and mahogany. Products using the two types of materials are made in separate premises under the supervision of separate production managers.

Data for the three months ended 30 Novermber 1987 are shown below.

Casement Ltd sells to a wide variety of users, so that window sizes and shapes vary widely; consequently a square metre of window is adopted as the standard unit for pricing and costing.
Sales budgets were based on the expectation that the company's share of the regional marlThe Window Federa tion's quarterly report reveals that sales in the regional mar1she wants a full analysis of sales variances as well as an analysis of the cost variances which can be obtained from the data.
Labour costs comprise the wages of shop-floor employees who receive a fixed wage for a 40-hour week; no overtime is worked.
Production managers receive a fixed monthly salary which is included in production overheads, plus an annual personal performance bonus (excluded from the above data) which is decided by the board of directors at the end of each year. Sales representatives are paid a monthly retainer plus commission of 5%
on all sales.
The management of Casement Ltd is keen to improve performance and is reviewing the company's reward structure. One possibility which is under consideration is that the company should adopt a profit-related pay scheme. The scheme would replace all the existing arrangements and would give every employee a basic remuneration equal to 90% of his or her earnings last year. In addition every employee would receive a share in the company 's profit: on the basis of the past year's trading th1s payment would amount to about 17% of basic remuneration for each employee.
Requirements

(a) Prepare a variance report for the managing director on the results for the quarter ended 30 November 1987, providing marl

(b) Interpret your results in part

(a) for the benefit of the managing director. (7 marks)

(c) Examine the issues (excluding taxation) which should be considered by the management of Casement Ltd in relation to the company's reward structure, with particular reference to the proposal to move to a profit-related pay scheme.

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Sales units Sales revenue Materials Plastic Mahogany Totals Budget Actual Budget Actual Budget Actual 3000 2500 1000 1250 4000 3750 (000) (2000) (000) (2000) (2000) (2000) 660 520 340 460 1000 980 (147) (120) (131) (160) (278) (280) Labour (108) (105) (84) (85) (192) (190) Fixed production overheads (162) (166) (79) (83) (241) (249) Sales commissions (33) (26) (17) (23) (50) (49) Other selling and administration costs Net profit (128) (133) 111 79