Question $3$

Mehta Bakers Ltd produce breads, cakes and pastries for sale to supermarkets. Their best$-$

selling product id the Mehta Naan. The company sources flour for the product from two flour

millers. Their products are called AllBake and CookSure respectively. Whilst basic quality is

important the decision on which supplier to use is primarily based on price.

A standard production batch on Naans uses $100$ kilos of a flour. Either flour can be used to make

the Naans. In the preparation of their budget for $2020,$ Mehta Ltd forecast an average price for

CookSure of $0\mathrm{.}40$ per kilo, and, as the price for AllBake was higher than this, prepared the

budget based on using CookSure. At the end of the period, the budgeted output of $1000$ batches

was achieved. The actual use of CookSure flour being $95,000$ kilos at actual cost of $37,050.$

However, now looking back over the year, the management of the firm have found that the

average market prices that existed for CookSure was $0\mathrm{.}90$ per kilo, and for AllBake $0\mathrm{.}60$ per

kilo. Flours cannot be mixed or changed in the baking process as changes to the setting of

machinery and the baking process are required. Therefore, Mehta does not allow the operating

managers to reverse the initial decision to use CookSure on a day$-$to$-$day basis if the relative

price of the substitute flour changes.

Required

Calculate materials cost, price and usage variances based on a static standard cost for

the materials.

Calculate revised variances allowing for planning and operational issues.

Using the calculations above, and referring to principles of good control information,

explain why variances that include both planning and operational issues provide better

control information.