The budgeted and actual results of the East Midlands branch of Ericka Ltd are now available...

  

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The budgeted and actual results of the East Midlands branch of Ericka Ltd are now available and Adam Monkman, Chief Accountant, is concerned that top management are proposing to reward the team with a bonus. Adam has met with the top management, stating "The current arrangement of awarding bonus payments based on sales figures does not make sense. The arrangement is far too generous and does not promote economic responsibility for overall results. If bonuses are paid, I suggest linking such payments to profit figures." Top management have responded with the following statement "We are not evading our responsibilities as a senior team overseeing the performance of the East Midlands branch. It is a known fact that we are operating in a challenging economic environment. Exceeding our sales targets deserves a bonus!" Adam has supplied you with the following data for the East Midlands branch, which relates to the last year: Budget Actual Sales units (Product S) Selling price per unit (Product S) Sales units (Product T) Selling price per unit (Product T) Raw material kilograms, per unit of Product S Raw material kilograms, per unit of Product T Direct labour hours, per unit of Product S Direct labour hours, per unit of Product T Raw material price per kilogram Wage rate per direct labour hour Contribution margin, Product S Contribution margin, Product T Total actual kilograms, Product S Total actual kilograms, Product T Total actual labour hours, Product S Total actual labour hours, Product T Fixed overheads Net profit 80,000 £25 40,000 £20 3 1.5 0.7 0.3 £3.00 £12.00 £7.60 £11.90 £460,000 £624,000 65,000 £25 45,000 £18 2.95 1.4 0.65 0.4 £3.20 £12.40 191,750kg 63,000Kg 42,250 hours 18,000 hours £475,000 £397,700 Required a. Prepare a detailed financial analysis of the performance of the East Midlands branch of Ericka Ltd, calculating as many variances as possible from the information provided. Include individual sales mix variances and individual sales quantity variances in your response. (19 marks) b. Provide a critical view on the senior management's response to Adam on the existing bonus arrangement based on exceeding sales targets for individual products. (6 marks) The budgeted and actual results of the East Midlands branch of Ericka Ltd are now available and Adam Monkman, Chief Accountant, is concerned that top management are proposing to reward the team with a bonus. Adam has met with the top management, stating "The current arrangement of awarding bonus payments based on sales figures does not make sense. The arrangement is far too generous and does not promote economic responsibility for overall results. If bonuses are paid, I suggest linking such payments to profit figures." Top management have responded with the following statement "We are not evading our responsibilities as a senior team overseeing the performance of the East Midlands branch. It is a known fact that we are operating in a challenging economic environment. Exceeding our sales targets deserves a bonus!" Adam has supplied you with the following data for the East Midlands branch, which relates to the last year: Budget Actual Sales units (Product S) Selling price per unit (Product S) Sales units (Product T) Selling price per unit (Product T) Raw material kilograms, per unit of Product S Raw material kilograms, per unit of Product T Direct labour hours, per unit of Product S Direct labour hours, per unit of Product T Raw material price per kilogram Wage rate per direct labour hour Contribution margin, Product S Contribution margin, Product T Total actual kilograms, Product S Total actual kilograms, Product T Total actual labour hours, Product S Total actual labour hours, Product T Fixed overheads Net profit 80,000 £25 40,000 £20 3 1.5 0.7 0.3 £3.00 £12.00 £7.60 £11.90 £460,000 £624,000 65,000 £25 45,000 £18 2.95 1.4 0.65 0.4 £3.20 £12.40 191,750kg 63,000Kg 42,250 hours 18,000 hours £475,000 £397,700 Required a. Prepare a detailed financial analysis of the performance of the East Midlands branch of Ericka Ltd, calculating as many variances as possible from the information provided. Include individual sales mix variances and individual sales quantity variances in your response. (19 marks) b. Provide a critical view on the senior management's response to Adam on the existing bonus arrangement based on exceeding sales targets for individual products. (6 marks)

Answer rating: 100% (QA)

a Sales volume variance 6500080000 x 25 250000 Sales mix variance 4500040000 x 25... View the full answer