Barnes Scuba Diving Assessment - Case Study Example

Running header: Cost accounting Student’s name: Instructor’s name: Subject code: Date of submission: Table of Contents Table of Contents 2 Executive summary 3 Introduction 3 Why does Barnes scuba diving school need to use variance analysis so as to analyse its cost and revenue performance? 4 Overview of Barnes Scuba Diving cost and revenue performance for the six months period; 5 The limitations that James and Rob ought to be aware of when analyzing the performance of Barnes Scuba Diving 6 Conclusion 7 References 8 Appendix: 9 Executive summary The importance of variance analysis to managerial decision making and control can not be overemphasized. It leads to more efficiency and hence better performance if quality standards are to be adhered to. As such, this report is aimed at analyzing the benefits of implementing variance analysis on Barnes Scuba Diving’s revenues and cost performance. The calculations regarding the analysis have been attached as appendices in this report. There has also been a critical examination of the factors leading to the variances observed in the company, the benefits of variance analysis to the company as well as the limitations that could result from overreliance on variance analysis while ignoring quality and employee morale for Barnes Scuba Diving Introduction James and Rob established Barnes Scuba Diving in 2000. The two friends intended to bring Scuba diving into people’s lives having learnt the skill elsewhere. The school was established around Surfers paradise and started offering a 3 day program to help beginner scuba divers develop their scuba diving skills for people around Surfers Paradise Queensland Australia. However, in the last six months, something interesting has happened in that the company’s profit projections were exceeded by actual performance despite some issues having affected the business and it had been expected that profitability would actually come down. As such, this report has been prepared to help Barnes Scuba Diving understand why their actual results were actually better than those projected while informing them of the need to undertake variance analysis on their revenues and costs. It is expected this will help them better manage their business resulting in improved performance. However, James and Rob ought to inform themselves of the inherent shortcomings associated with use of variance analysis as has been explained in the report. Why does Barnes scuba diving school need to use variance analysis so as to analyse its cost and revenue performance? The case has made it clear that despite having made more profits than they expected, Barnes Scuba Diving owners do not yet know why their performance was different from what they had anticipated. It also means that they also don’t know which parts of the business performed better than others and hence contributed to the improved profits and which parts performed worse than expected and hence may have contributed to a lower profit than the business should have made. It means that the business could even go bankrupt without them establishing the cause. Having made a better profit than expected, they would not be aware of the parts of the business that needs more investment so that they can make even better returns in future. Thus, by suggesting that they carry out a variance analysis, their friend is helping them get more informed about issues affecting their business’ cost and profit performance. The analysis will help them establish the businesses weaknesses and strengths so that they will be able o make better decisions on allocation of resources and investment in the business. This way, the owners can gain greater control of their business’ expenses and costs by way of monitoring whether their actual costs are in line with their budgeted costs and if they differ, establish the causes of the difference and hence put in place remedial measures. Furthermore, through constant cost and revenue variance analysis, the business can establish opportunitites, issues, and trends affecting the business thus better planning for Barnes Scuba Diving’s success in future. Variance analysis is a tool of control which is achieved through analysing projected costs and revenues against the actual ones. In the case of Barnes, they were able to discover that although the profits increased, the prices and expenses were also on an upward trend. Barnes Scuba Diving is therefore in a better position to establish why this happened and thus put in place measures aimed at bringing costs down so that profits can improve further. In other words, variance analysis helps the company to come up with remedial strategies for adverse variances while improving on desirable ones. Thus, variance analysis has equipped James and Rob with a tool for managerial control as they are now in a better position to initiate mitigation actions so that the school can achieve their projections especially in regard to undesirable variance from projections. Thus, they will be able to improve on their efficiency so that they can be more profitable in future. Variance analysis will also be a forecasting and prediction tool for James and Rob. Through variance, they will be able to identify changes associated with seasonal changes and thus be better prepared in dealing with the seasonal changes. This way, they can ensure that their business remains profitable throughout. Overview of Barnes Scuba Diving cost and revenue performance for the six months period; Arising from the case, it has been established that there was a significant increase in profits arising from an increase in revenue to $756,000 from the projected volumes of $630,000. This change resulted from a number of factors including the significant rise in the number of courses that are being offered at the school. The courses increased to 336 courses from the projected 300 courses. This significantly increased the revenue. The company is also noted to have increased prices for each course offered to $375 from $350 that had been projected. It should also be noted that the costs for the business significantly differed from the original projections. There were a number of factors that caused these variances including the increase in the cost of log books being increased by 10% while also bearing in mind that the number of courses offered also increased. It has also been stated that a total of 403 certificate cards had to be replaced due to mistakes in printing which significantly increased the average price of a card to $23.29 from the projected cost of $18. It should also be noted that owing to the bad weather, some courses had to be rescheduled while the business decided to offer more competitive rates to instructors’ thus significantly increasing variance in labour. Due to the ongoing road constructions and hence the change in the route used, the distance and hence petrol costs increased. It should also be born in mind that the cost of petrol per liter increased and this caused the variance in energy prices. The decision to replace the new printer with a lower cost printer resulted in bad quality manuals thus increasing the average production cost per manual by 25%. The variance in depreciation resulted from the fact that there was an item that had been depreciated despite its having been written off. Finally, the company had to replace the small T-shirts which led to increases in average cost per T-shirt. It should be noted that due to the variances noted in the above costs, the indirect costs also varied greatly from what had been projected. Based on the above discussion, the variances observed are interdependent. While costs and revenues are noted to have generally increased owing to the increase in the number of courses, indirect costs increased owing to the increase in other costs as stated above. This implies the need for James and Rob to put in place strategies to mitigate the rising costs. Some mistakes like incorrect spellings on certificates can be avoided by the secretary being more careful in future. In addition, the company needs to consider modifying the new printer so that it can offer the right quality of print or revert back to the original printer. Other steps that could lead to improved performance at Barnes Scuba Diving include considering charging students for each log book they loose in a bid to bring down costs of replacement. Increasing the company’s marketing efforts will result in further increases in the number of courses offered and hence more revenue. The company should be very careful when giving measurements for T-shirts production to the new company given that they have no experience with Barnes scuba diving in a bid to eliminate having to replace T-shirts that do not conform to the right measurements thus bringing down the costs of T-shirts. The company’s accounting department also need to be very careful in observing necessary accounting standards, depreciating an already written off item could be avoided next time. When the road constructions have been finished, the company should immediately revert back to its original route in a bid to bring down energy costs. Finally, the company should consider negotiating for discounts with its suppliers in a bid to bring down operation costs while maintaining quality of service. This way, the company will be able to increase its profitability given the increased prices and number of courses. The limitations that James and Rob ought to be aware of when analyzing the performance of Barnes Scuba Diving In performing the variance analysis for their business, James and Rob ought to be informed of the following shortcomings associated with variance analysis; (a) Limitations affecting The Barnes Scuba Diving business as a whole;- The fact that variance analysis only takes place at the end of the accounting period, it is likely that contained in the variance analysis reports will be outdated to an extent of becoming useless since useful reports ought to be prepared on a timely basis so that corrective measures can be undertaken before situations escalate. James and Rod should also bear in mind that a positive variance does not always imply that things are OK. For instance, a positive variance on materials may result in materials being sold at a cheaper price. However, the cheaper materials may be of lower quality than those sold for higher prices. This was evidenced in the case of printer whose replacement to a cheaper version resulted in poor quality that turned to be even more expensive than the original version of manuals. Poor quality would hence result in dissatisfied customers and hence poor sales despite a positive material variance. Rob and James should also be careful not to overemphasize on meeting the resultant standards at the expense of quality and hence customer satisfaction. This is likely to be detrimental to the company’s future despite there having been a positive variance. At times, the standards having been met may result in those involved resulting to idleness as opposed to striving to continuously improving quality given the nature of competition in the contemporary market environment. (b) The limitations to Individual employees within Barnes Scuba Diving If James and Rob will result in using variance as a punishment tool, this will greatly hamper their employees’ morale/ motivation to work harder and hence give quality results. Focusing on negative aspects of employees being unable to hit the standards of favorable variance is not healthy. This is because employees may develop clever tactics for “meeting” the variances thorugh actions that are negative to the company’s good. The variances assume that labour related variances are purely based on pace of labour and hence faster work implies bigger results. However, for a firm like Barnes Scuba Diving, this may be misleading. This is because it doesn’t mean that by working harder, more courses are taught even when there are no students to be taught the more courses. In addition, this may hamper quality of out put which may result in half baked Scuba divers. Conclusion Various reasons have been established to have variances caused the variances in revenues and costs observed in Barnes Scuba Diving. Further, the usefulness of variances analysis in James and Rob’s business performance can not be overemphasized. This is because variance analysis will help them better manage and control costs and revenues by initiating measures to ensure compliance with standards. However, James and Rob have been informed of the potential limitations that could result from using variance as a club while ignoring other important matters like employee motivation and quality of service. Thus, Barnes Scuba Diving will be better placed to apply variance while at the same time ensuring high quality standards and continued employee morale. References Aden, D2003, Issues in contemporary cost accounting, Oxford, Oxford University Press. Appendix: Item Standard quantity Standard price Direct materials Certification cards 1800cards $18.00/ card Open water manuals 1800 manuals $12.00/manual Dive log books 1800log books $8.00/log book T-shirts/sweater 1800 t shirts/sweaters $15.00/sweater Direct labour Instructor’s labor 7200 hrs $30.00/direct labour hour Variable overheads Petrol 9000 km $0.8 per km Advertising 600 courses $30 per course Indirect materials 300 courses $0.2/$ of direct material Administration costs 300 courses $5.1/direct labour hour Actual Budget Variance Sales units 336 300 36 Sales $756,000 $630,000 $126,000 Direct materials Certificates $47,172 $32,400 $(14,772) Open water manuals $23,940 $21,600 $(2,340) Dive log books $20,402 $14,400 $(6,002) T shirt/sweater $47,174 $27,000 $(20,174) Direct labour Instructors labor $268,800 $216,000 ($52,800) Variable overheads Petrol $12,096 $7,200 ($4,896) Advertising $16,128 $18,000 $1,872 Indirect materials $34,673 $19,080 ($15,593) Administration costs $28,560 $36,720 $8,160 Total contribution margin $257,055 $237,600 $19,455 Fixed overhead Advertising $10,000 $12,000 ($2,000) Rent $18,000 $9,000 ($9,000) Insurance $13,000 $11,000 ($2,000) Depreciation $15,000 $20,000 $5,000 Other $9,000 $10,000 $1,000 Net Profit $192,055 $175,000 $17,055 c) i Sales volume variance (Actual Unit Sold - Budgeted Unit Sales)   x   Standard Profit Per unit Standard profit per course =net profit/number of courses =$175,000/300 =$583.33/course Sales volume variance = (actual courses – budgeted courses) × standard profit per unit = (336-300) ×583.33 =$21,000 ii) Selling price variance =   (Actual price – Standard price)× actual units sold = (375×6- 350×6) ×336 =$50,400 Item Quantity variance Certificates (2016×18)- (1800×18) =$3,888 Open water manuals (2016×12) – (1800×12) =$2,592 Dive log books (2016×8)- (1800×8) = $1,728 T shirt/sweater (2016×15)-(1800×15) =$3,240 Price variance Certificates = (2016×23.39)- (2016×18) = $10,884 Open water manuals = (2016× 11.875)-(2016×12) = $-252 Dive log books =(2016×10.12)-(2016×8) = $4,274 T shirt/sweater =(2016×23.39)- (2016×15) =$16,934 iv) Rate and efficiency variances : direct labour; Rate variance = (8,064×33.33)- (8064 ×30) =$28,800 Efficiency variance =(8064×33.33)- (7200×30) = $52,800 v) Spending and efficiency : variable overhead category; Item Spending variance Petrol ($12096-(10080×0.8) =$4,032 Advertising $16,128- (600×30) =($1,872) Indirect materials $34673- (27737.6) =$6935.4 Administration costs $28,560-(8064×5.1) =-$12,566.4 Efficiency variance Petrol 7200-(10080×0.8) = $864 Advertising $18,000- (336×30) =$7,920 Indirect materials $19,080- (27,737.6) =-$8657.6 Administration costs $36,720- (336× 5.1) =26,438.4 vi) Spending variance: fixed overhead category Advertising =$10,000-120000 =-$2000 Rent =$18000-9000 =$9000 Insurance =$13,000-11000 =$2000 Depreciation =$15,000-20000 =-$5000 Other =$9,000-10,000 =-$1000 Read More