Question

Nutty Ltd processes whole nuts and grains to produce and sell healthy cereal products such as muesli and cereal bars. It buys unprocessed grains and nuts and processes the grains with additives (eg, sugar, and other flavourings) to produce the museli and cereal bars. In the process, some grains and nuts are cleaned" or have the outer layer removed, meaning that there is substantial loss of weight in the process. The market for the products of Nutty Ltd has been stable and is expected to remain so. Nutty Ltd uses a variance analysis system to monitor its performance. There has been some concern about the interpretation of the variances that have been calculated in January, as follows: • • The purchasing manager is adamant, despite criticism from the production director, that he has purchased wisely and saved the company a lot of money in purchase costs, especially as food costs (wheat, maize etc) increase due to supply shortages. The purchasing manager has sourced new suppliers in recent months as well as securing supplies for the coming months. The production director is upset at being criticised for increasing the wage rates for January. He feels the decision was the right one as morale was poor and he had to do something about it. The maintenance manager feels that saving £4,500 on fixed overheads has helped the profitability of the business. He argues that the process machine annual maintenance can wait for another month without a problem as the machines have been running well. • The variances for January were calculated as follows: Material price Material usage Labour rate Labour efficiency Labour idle time Variable overhead expenditure Variable overhead efficiency Fixed overhead expenditure Sales price Sales volume 24,000 (Fav) 26,000 (Adv) 7,500 (Adv) 9,000 (Fav) 6,000 (Fav) 9,000 (Adv) 15,000 (Fav) 4,500 (Fav) 42.500 (Adv) 10.500 (Adv) Variable overhead is attributed to products on the basis on labour hours. Required Comment on the performance of the purchasing manager, the production director and the maintenance manager based on the variances given above for January. Reach a conclusion as to whether or not each manager performed well. 15 marks

Answer 1

Purchasing Manager:

Purchasing Manager is responsible to make sure that the requisitioned material is purchased for an optimal price at required times.

Based on the variance analysis, he has performed well as we have a material price variance favourable to the company.

He can not be held liable for material usage as it is the responsibility of production manager.

Production Manager:

Production Manager is responsible to make sure that the production is done without any hindrance at an optimum level.

Based on the above variances he did not perform, due to the presence of idle time.Though the labor rate is increased to boost employee morale,corresponding to their efficiency level is justifiable.The presence of labor idle time variance and adverse material usage proves that the production was not planned ahead well. Also the adverse material usage clearly says about excess material used, which is again because the raw material has to be processed leading to excess wastage,also the entity has an option of purchasing grains without its bran(Outer layer), which it can not presently because production was planned differently.

Maintenance Manager:

Maintenance Manager is responsible to make sure that the production is carried out without any machine rundowns as efficiently as possible.

The manager does not seem to carry out his functions responsibly, as he suggests of postponing of annual maintenance by a month, where we clearly know that maintenance is done to reduce the risk of machine rundowns and subsequently hindrance the market share of the entity and its survival opportunities, just to reduce fixed overhead for a month.

Here he seems to align his goals with short term objective-c of the entity, instead of its vision, mission.