Submitted To : Directors of Khan LTD
Subject : Significant Variances Report
Date : October 10th 2018
From : Sholes Abraham
I am writing this report to bring to your attention some of the issues found in last month's reports. After looking at the variances it's clear that the business has had a difficult time. This is because there are lot of differences with the cost from the original values. I'll be looking at all the variances and finding different strategies to improve the variances that need to be corrected.
The first variance I would like to talk about is the controlled cost variance. From looking at the September reports, I've noticed that there was an adverse material price variance for Cardboard. This shows that there must have been a higher purchase cost of cardboard within that month compared to other times. This could have happened due to the production of better quality materials to make the cardboard, this would result in a higher price for the item hence increasing the material price variance. The production of good quality cardboards is important and it accounts to 80% of the business.
The company has been exporting materials in from South Korea, as materials that are being used for the product can't be sourced locally. The company imports items from another country. This results in high transportation costs, due to harsh weather conditions in the Far East made it difficult for the materials to be shipped. These resorts to sending the materials by air transport as its expensive.
The process is more expensive by using the ‘just in time system' as materials give in source in last minute.
In conclusion, the increased labour costs set by the government means that its uncontrollable. The minimum wage was raised up by 9% over the level of inflation, however only 35% of the production staff are being paid at this level. The rest are being paid by the market rate. This difference could be because these workers are more specialised and skilled than the remaining. By providing workers with higher pay would have meant a result in higher productivity. To a favourable variance Khan Ltd should've increased the selling price of the product.
Furthermore, there is an adverse variance for the fixed overhead, this is due to the fact that the company decided to spend an additional £350,000 on marketing. As the company felt that by getting their product more known to the public would
help to increase the profit compare to their competitors.
I've noticed that the company decided to decrease the cost of their product to £42 this was due to the fact there was a new competitor which resulted the two companies having a price war.
After Khan Limited lowered their prices, the new plan seemed to work. They've sold 7,000 more used than planned. This strategy in my opinion is good for short term however it's not beneficial for long term goals. As the short time will let Khan Ltd have more competition. If they had £49 instead of £42 the company would have been able to make a revenue of £6,615,000. on the other hand, as they went down to £42 they were only able to profit of £5,964,000. If the company wanted to make the same profit they would have, by sticking to £42 they would need to sell 157,500 units rather than 22,500 units.
Looking at the variances I have picked up on numerous point which can be improved. The first of which is related to the Material Price Variance of the cardboard. After looking at the possible ways for the business to save money and make a bigger profit I have found two ways. First in which finding a different supplier closer to the head office, this is because by having materials imported in from another country it is really expensive, so by finding materials that are easier to obtain will allow the company to cut down on transportation costs.
Another way the business could save money is by changing their buying system from just in time method to buying the materials in bulk. This means that allow the company to lower the variable costs but a huge amount moreover some suppliers offer price cuts for bulk buys so the company would be able to say money. The downside to this is that by buying in bulk you will need a place to store everything. This could have a negative impact as it could mean that it would increase the cost of fixed overheads.
Incorporating these money saving strategies into the business plan can allow the business to increase the value of their product back to £49. By incorporating the strategy's, I have outlined, will allow the business to bring in more profit in time. An increase in the profit for the business will allow the Khan Ltd to cover uncontrollable rates.
...(download the rest of the essay above)