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  • Subject area(s): Marketing
  • Price: Free download
  • Published on: 14th September 2019
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  • Number of pages: 2

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To – Senior management team

From – Shiv-Raj Radia

Date -14/10/2018

Title – Analysis of significant variances

This report has been created to identify variances over £10,000, giving a detailed analysis of the reasons behind them; whether the variances could be reduced and if they are controllable or uncontrollable.

Variance

Amount

Adverse or favourable

Material price (cardboard)

£798,400

Adverse

Material usage (cardboard)

£8,500

Adverse

Material price (other)

£2,025

Favourable

Material usage (other)

£1,550

Adverse

Labour rate variance

£279,600

Adverse

Labour rate efficiency

£9,900

Adverse

Variable overhead rate

£2,700

Favourable

Variable overhead efficiency

£9,800

Adverse

Fixed overhead expenditure

£512,000

Adverse

Sales price variance

£284,000

Adverse

Sales volume variance

£85,750

Favourable

Sales price variance

Sales price variance is adverse; this is because Khan Ltd chose to lower price per unit by £7 to react to new market entrance making the variance controllable. Even though Khan Ltd sold more units the reduced price is not the sole reason. [1] They also went through an advertising campaign to increase sales. Khan Ltd could have reacted differently by conducting research to identify and create their unique selling point to differentiate from the competitor. [4]

Material price variance - Cardboard

The material price of cardboard varies adversely. This is partially due to the weather conditions making the original transport method obsolete, this led to the business having to change transportation methods. Sending materials by air has a much higher price tag, but it does have advantages, quicker delivery times and more reliability. [3] This falls in line with Khan's Just In Time production plan that the business operates. Ordering materials when required and beginning production to meet customer demand. This is an uncontrollable variance due to the small-scale disaster and the lack of an alternative means changing to a more expensive method is compulsory.

Labour rate variance

Labour rate variance is significant. This is due to government legislation as the minimum wage rose by 9%, an uncontrollable variance, and the business now must pay workers at the higher wage. The budget needs to be adjusted for the new minimum wage. Around 35% of the production staff are paid at the minimum wage whilst 65% paid at higher wage. Khan Ltd can invest in making the production process more mechanical, making unskilled workers roles be obsolete. [6] This leads to a smaller, more efficient workforce. Aiding skilled workers with machinery may lead to paying skilled workers at minimum wage. This could lead to fewer hours or reduced pay which would both reduce the variance.

Fixed overhead expenditure variance

Fixed overhead expenditure varies the most. This was partially due to the marketing costing £320,000 which was not budgeted for, leading to an unexpected increase in expenditure. This is a controllable variance as the business chose the marketing campaign. Potentially marketing through different methods such as social media could have fallen within the budget.

Furthermore, the spoilage increased the fixed overhead expenditure, this was uncontrollable as it was due to harsh weather conditions. The spoilage led to a stock-out leading the production to halt while workers are being paid. Changing salaries due to overtime. The Just In Time production method leads there to be no stock when delivery fails. However, the Just In Case production method allows a business to react to external factors. This method holds buffer stock so the business can continue production. [5] Keeping the buffer stock still to a minimum so none is left out-dated due to market conditions. This was the uncontrollable aspect.

Sales volume variance

The sales volume variance is significantly favourable. Increased sales by 7000 units are due to the lower price and marketing campaign. Even though it is favourable this is only due to the excess money that has been spent on the marketing and lost on the lower price, leading to many significant adverse variances that outweigh the sales volume variance. This a controllable variance, Khan Ltd changed the price which easily led to more sales.

Strategies

Undergoing a marketing campaign focusing on Khan Ltd's unique selling point and using cost-effective methods to reduce variances and increase sales even further. [2] Increasing customer satisfaction hence increasing customer loyalty, increasing barriers to entry which would reduce the number of competitors joining and potentially remove some of the competitors with little market share.  This can be done by extensive primary and secondary research to give the business an upper hand to the new inexperienced business that has just entered the market.

An Exclusive rights method would be effective. [6] Khan Ltd.'s high-quality cardboard can only be found in South Korea; the business could begin an exclusive relationship so that new competitors cannot purchase from the same supplier raising the barriers to entry. [1] This also allows the business to boost its unique selling point as they are guaranteed another business cannot have the same quality. Even though exclusive rights can be expensive it can benefit over a long period.

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