Ace crampons


The aim of this report is to analyse production of Ace crampons for Climbing Equipment Plc according to the standard cost card and actual results. The requirements for the analysis are:

* Preparing an operating statement for Ace crampons for the month of December 2009;

* Evaluating the performance of Ace crampons in December 2009;

* Determining three possible reasons why the actual cost per unit may differ from the standard cost;

* Explaining the relationship between labour rate and labour efficiency as well as material price, quantity and labour efficiency and

* Identifying four limitations of standard costing and variance analysis.

In addition to these requirements, this report also reviews of criticism against budgeting process which suggest total abandonment of budgeting system and discusses the validity of beyond budgeting put forward by Hope and Fraser (1997).

Part A) Analysis of Production of Ace Crampons
1. Operating Statement for Ace Crampons for December 2009

In order to prepare the operating statement for Ace crampons, it is essential to conduct variance analysis. Variance analysis can be either on quantity and price. To prepare the operating statement, it is necessary to compute both quantity and price variances.

Price variances include computation of material price variance and direct labour rate variance. Overhead expenditure variance is not included because it is fixed expenditure.

1. 1. Price Variance

Material price variance needs to be calculated for component used for the production of Ace crampons. According to the information given, the actual prices of self grip bolts, steel rings and fabric rivets were the same as the standard price for these components. This means there is no price variance between budget and actual results. Therefore, material price variance is computed for steel plate, non-slip buckles and nylon webbing. It is also essential to compute price variance in direct labour as well.

· For steel plate

Standard price £16.50

Actual price £6,240 for 390m2 = £16

Material variance = (16.50-16) * 390 = £195

· For Non-Slip buckles

Standard price £0.55

Actual price £3,900 for 7,800 buckles = £0.50

Material variance = (0.55-0.50) * 7800 = £390

· For Nylon Webbing

Standard price £1.80

Actual price £1.75

Material variance = (1.80-1.75) * 7200 = £360

2. Direct Labour Variance

Direct labour variance is as follows:

Standard rate £18/hour

Actual rate £18.25/hour

Labour rate variance is = (18-18.25) * 2220 = (£555)

1. 2. Quantity Variances

Quantity variance measures the difference in quantity of material used in actual production and the expected use of material.

· For steel plate

Standard usage 0.2m2/unit

Standard price £16.50/m2

Actual production 1,850 pairs

Actual material used 390 m2

Standard usage of actual production = 1850 * 0.2 = 370/m2

Material usage variance = (370-390) * 16.50 = (£330)

· For Self-grip Bolts

Standard usage 6

Standard price £0.10

Actual production 1,850 pairs

Actual material used 11,250

Standard usage of actual production = 1850 * 6 = 11100

Material usage variance = (11100-11250) * 0.10 = (£15)

· For Steel Rings

Standard usage 16

Standard price £0.05

Actual production 1,850 pairs

Actual material used 30,100

Standard usage of actual production = 1850 * 16 = 29,600

Material usage variance = (29600-30100) * 0.05 = (£25)

· For Non-Slip Buckles

Standard usage 4

Standard price £0.55

Actual production 1,850 pairs

Actual material used 7800

Standard usage of actual production = 1850 * 4 = 7400

Material usage variance = (7400-7800) * 0.55 = (£220)

· For Steel Fabric Rivets

Standard usage 24

Standard price £0.05

Actual production 1,850 pairs

Actual material used 46,000

Standard usage of actual production = 1850 * 24 = 44,400

Material usage variance = (44400-46000) * 0.05 = (£80)

· For Nylon Webbing

Standard usage 4

Standard price £1.80

Actual production 1,850 pairs

Actual material used 7,200mm

Standard usage of actual production = 1850 * 4 = 7400

Material usage variance = (7400-7200) * 1.80 = £360

1. 3. Direct Labour Efficiency

This measures the effect of actual and expected number of hours on profit.

Standard hours 1.25

Standard rate £18

Actual hours 2220

Actual production 1850

Standard hours of actual production = 1850 * 1.25 = 2312.5 hours

Labour efficiency variance = (2312.5-2220) * 18 = £1665

Having identified variances in quantity and price, it is necessary to calculate total material variance and total labour variances.

Total material variance = [£195+£390+£360]+[(£330)+(£15)+(£25)+(£220)+(£80)+£360]

= 945 + (310) = £635

Total labour variance = (£555)+ £1665 = £1110

1. 4. Sales Variances

Although variance in sales is not a cost account, its computation is essential for operating statement. Sales variances are computed in terms of price and volume.

· Sales Price Variance

Budgeted Selling Price £55

Actual Selling Price £48.50

Actual production 1,850

Sales price variance = (55-48.50) * 1850 = (£12025)

· Sales Volume Contribution Variance

Budgeted sales volume 2000 units

Budgeted profit/unit £17.20

Actual sales volume 1850 units

Sales volume variance (2000-1850) * 17.20 = (£2580)

Total material and labour costs in flexed budget are as follows:



3mm steel plate (370*16.5)


Self-grip bolts (0.1*11100)


12 mm diametre steel rings (0.05*29600)


Non-slip buckles (0.55*7400)


Steel fabric rivets (0.05*44400)


10mm nylon webbing (1.8*7400)


Total Direct Material


Direct Labour (2312.5*18)


In the light of calculations made above, operating statement for Ace crampons for December 2009 is prepared and shown below:

Flexed Budget




Price/Rate/ Expenditure


Non-financial Data




Direct Material

steel plate



Self-grip Bolts



Steel Rings



Non-slip buckles



Steel Fabric Rivets



Nylon Webbing



Total Direct Material



Direct Labour








Sales (£55/£48.50)






Less Costs:



















Fixed Overheads




Net Profit






2. Evaluation of Performance of Ace Crampons in December 2009

According to the Operating Statement for December 2009, the actual sales occurred less than the projected levels. The main reasons were low sales price and lower actual sales in terms of sold units. Therefore, the net profit generated from Ace crampons was lower than projected figures by £10,280. However, we achieved favourable results in direct material cost since the actual cost was lower than the expected cost. Nevertheless, in terms of material use, the production was inefficient because in actual production the usage of materials were higher than expected.

In the case of labour, the cost was higher than expected due to increase in wages per hour however; direct labour hours were lower in actual production than projected. This shows that direct labour required for production of one unit of crampons decreased. The underlying reason is the learning curve as the worker gains experience day-by-day and therefore reduce the time needed for production. This indicates that the efficiency is improved in terms of direct labour usage.

To improve our profitability, we should first focus on reducing wastage in production process. This will make positive contribution to the profitability of the Ace crampons.

3. Causes of Variation in Actual Cost from Standard Cost

Variation is the difference between actual cost and expected cost. Variation in variable cost depends on three main factors which are material, labour and overheads. Increase in material price or amount used for production are the main drivers for material-related variation. Changes in wages rate and efficiency of workers are the main drivers for labour-related variation. Change in price of variable overheads and efficiency are the main drivers for variable overhead-related variance (Biggs, 2008).

4. Explanation for Relationship between Variances

In order to identify the underlying reasons behind variation, it is essential to check if there is any relationship between variance drivers. In this context, it is essential to look at the relationship between labour rate and labour efficiency.

Labour efficiency can be increased by improvement in working conditions and labour rate is one most important component which affects working conditions. In this frame, it can be said that increase in labour rate will lead in improvement in labour efficiency. This is evident from the analysis of Climbing Equipment Plc’s production of Ace crampons. The actual labour rate increased from £18.25 in December 2009. Although the labour cost increased, the effect of this increase on profit was less because in line with the increase in wages cost per hour, the efficiency of labour improved and therefore the total labour hours occurred at 2220 hours which was lower than expected.

In the same way, the relationship between material price, quality and labour efficiency can be examined. High quality raw material has positive impact on labour efficiency. Although its cost is high, the impact on labour efficiency will be positive because with high quality material there will be low wastage and spoilage (Principles of, 2010). This is evident from the production of Ace crampons on December 2009. In this period, the actual material cost was lower than expected however the efficiency in material usage was also down. This might indicate that the company might have used low quality material for the production of crampons and there might have some defects on the raw materials due to low quality. Therefore, the worker has to spend more time. Although the labour efficiency increased during December 2009, if the quality of material was high, it is probable that the labour efficiency would have improved more.

5. Limitations of Standard Costing and Variance Analysis

Despite the advantages, standard costing and variance analysis have several limitations. These are:

· Difficulties in setting standards: For setting standards, companies need to conduct systematic and quantitative analysis which require careful examination of production process and therefore takes longer time and necessitates investing money. In addition, in the case where the standards are set far above than achievable levels, it may reduce the motivation of employees and may cause frustration.

· Applicability is limited for certain industries: Standard costing and variance analysis does not have applicability in each industry particularly for those which adopt non-standardised production methods such as job. This is because in each accounting period, the production changes.

· Limited adaptability of technological change: When there is frequent change in production technology, standard costing and variance analysis have limited applicability. This is because, every time there is a change in technology, it necessitates revising the standards set for the production. As this costing method require high amount of time, its advantages will be limited.

· Standards are subjective in nature: Although standards are determined through careful examination of production process, their identification is determined according to managers’ observations and this makes standard costing and variance analysis subjective (Hilton, Maher and Selto, 2003).

Part B) Critical Review of Criticism against Budgeting

Typically, budgeting is the essential activity within financial planning that assists the financial objectives of an organisation or management (McMenamin, 1999). This is due to the control over spending that budgeting permits as well as the reporting features it offers including that of forecasts.

Budgeting is associated with such activities as setting goals for performance, resource allocation and financial control of expenditures. Therefore budgeting can be seen as an essential organisational process. Recently, critics have argued that additional performance measures are needed due to the changes in the business environment and that one model is not enough (Barsky and Bremser, 1999).

Kaplan (1988) states that the primary reason for the conventional budgeting systems failing is that they did not present precise and time-efficient data that was needed to create efficiency or measure cost.

Bunce et al (1995) detail the reasons why conventional budgeting has become ineffective in the current world of business. Bunce et al. (1995) explain that the changes that occur in this environment are extreme and constant, but the advantage to this situation is due in part by the changes in technology that allow cost reduction. Additionally the increase of globalisation is seen as an advantage in this respect due to the necessity of providing new and divers products, reaching new customer bases, and facing competitive forces which contribute to the advancement of services and products. These aspects have been developing due to the establishment of new markets as they became available through globalisation.

Following to the identified limitations, Hope and Fraser (1997) developed Beyond Budgeting Round (BBR). This model is proposed as new management model which is offered as an alternative for traditional budgeting process. This model suggests following adaptive and devolved approaches in production process. It is argued by scholars that with BBR, firms can become more responsive to market changes as this method brings simplicity to overall management. In addition, it leads to better governance in organisations as this model requires clear objectives to achieve which will lead to development of innovative strategies. This is because this method encourages trust commitment and knowledge sharing. Moreover, application of this model will lower the cost as the model requires knowledge sharing not only in the context of employees and management but also suppliers and customers. Since this model requires building relationship between customers and organisations, it will also contribute increasing loyalty towards offerings of companies. This is because, this model suggest that the needs of customers should be at the heart of strategy and processes of companies. As customer needs are the main driver of production and other functions of organisations, offering of firms which employ BBR will exceed the expectations of firms and therefore create higher satisfaction. The higher the satisfaction, the higher the customer loyalty.

The study conducted by Neely, Bourne and Adams (2003) showed that several well-know companies such as Shell, Ford Motor Company, British Petrol, Borealis A/S, Volvo have not been using traditional budgeting for a while and replaced this with forecasting and balance scorecard in order to monitor their processes. They also use such systems in increasing employee contribution as such methods require targeting setting by employees.

The balance of arguments shows that although budgeting has limits, it is still an essential aspect of the current organisational structure and function. However, as opposed to retiring the budgeting process altogether, many adaptive budget methods such as zero-based budgeting, profit planning, forecasts, rolling budgets and activity based budgeting can be established to address the disadvantages produced by conventional budgets.


* Barsky, N. P and Bremser, W. G. (1999) “Performance Measurement, Budgeting and Strategic Implementation in the Multinational Enterprise”, Managerial Finance, Vol. 25, No.2, pp. 3-15

* Biggs, C. (2008) MBA Management Accounting Course Handbook, University of Wales

* Bunce, P.; Fraser, R. and Woodcock, L. (1995) “Advanced Budgeting: A Journey to Advanced Management Systems”, Management Accounting System, Vol.6, pp. 253-265

* Hope J. and Fraser, R. (1997) “Beyond budgeting: breaking through the barrier to “the third wave”. Management Accounting, Issue, December, pp. 20–23.

* Kaplan, R. S. (1988) “One Cost System isn’t Enough” Harvard Business Review, Issue: January/February, pp. 61-66

* McMenamin, J. (1999) Financial Management, London: Routledge

* Neely, A.; Bourne, M. and Adams, C. (2003) “Better budgeting or beyond budgeting?”, Measuring Business Excellence, Vol. 7, No.3, pp. 22-28

* (2010) “Tools for Enterprise Performance Evaluation”, available at:

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