MANAGEMENT ACCOUNTING
XLG is a cleaning product company located in the eastern part of Britain which produces two cleaning agents, chemical X and Y. Chemical X instantly cleans stains off any surface and can be used on upholstery fabrics and kitchen surfaces, while chemical Y cleans and shines all kinds of floor surfaces. XLG operates in a highly competitive environment; however, over the years they have maintained their market leading position due to the patent secured against famaQ; a superior cleaning agent, meaning it can’t be copied by other competitors within the industry. XLG has opened several stores across the UK and sells their products online as well, they host a lot of demonstrative shows in order to lure customers to their products. During the second quarter of the year starting March 2020, the corona virus broke out and a nationwide lock down was enforced by the UK government to combat the pandemic, thus forcing XLG to move all its sales online. PART A Find below extracts of the management information for that period: Total units sold: 1600 Material price variance: £27000 F Assume the 20/21 accounting year for XLG starts on the 1/12/19. Notes 1. Sales and Contribution: The budgeted total sales for both chemicals X and Y was 1190 with an equal split of 595 between both of them. Actual sales volume for chemical X was 850 and 750 for chemical Y, standard sales price was £35 per unit for chemical X and £30 per unit for chemical Y. The actual sales price achieved in the second quarter were £45 for chemical X and £37 for chemical Y. The standard margin for chemical X was £25 per unit and £20 per unit for chemical Y. one of the reasons for the increased selling price was due to a significant increase in demand for cleaning products as most people became more hygiene conscious in light of the pandemic. 2. Material price: The sole reason for the variance was an increase in the price of famaQ which is their superior cleaning ingredient with an original standard price of £2.50 per unit. Each unit of chemical X and Y requires 1 unit of famaQ; however, due to the lockdown and restriction on international travel, famaQ which is produced in Brazil had to be imported using air transport which is more expensive in comparison to sea transport, thereby resulting in an increased unit price of £4.50 per unit. XLG actually paid £3.70 per unit for famaQ. Required: Calculate the following for the second quarter, showing all workings clearly: (i) The sales price variance and sales volume contribution variance. (12 marks) (ii) The material price planning variance and material price operational variance. (8 marks) (iii) Given the change in operations, critically analyse the merits and demerits of using variances in assessing managers performance. (1000 words, 30 marks) PART B Given the risk posed by importing famaQ and how it has affected XLG during the lockdown, the management has required you provide a report assessing the decision to make famaQ in house in the UK or keep importing it from Brazil. You may consider the following additional information: a) FamaQ gives XLG competitive advantage b) Demand for chemical X and Y has increased by 45% which is likely to continue according to market research. c) The cost of making a unit of famaQ in the UK is £3 with delivery times reducing by 15 working days. SOURSES Essential: Core Text Management accounting for decision-makers by Peter Atrill and E.J. McLaney: 2018 (9th edition). √ Essential Financial and management accounting: An introduction by Pauline Weetman, 5th ed. Harlow: Financial Times Prentice Hall 2011