Polysar Limited Case

Topics: Costs, Management accounting, Cost Pages: 5 (1469 words) Published: July 23, 2014
| Polysar Limited|
Memo
| |

For the first nine months in 1986, NASA rubber division generated a sale of $66 million which exceeded the budgeted sales by $4.7 million. At the same time, NASA created a positive gross margin of 40 million which exceeded the budgeted gross margin by $3.7 million. However, they experienced a net loss of .876 million, which was $2.8 million lower than the budgeted amount.

 | Actual| Budget| Difference|
 | ($'000)| ($'000)| ($'000)|
Sales| 66,032| 61,260| 4,722|
Gross margin| 40,945| 37,210| 3,735|
Net profit| -876| 2,005| -2,881|

To better understand these financial figures, our group first conducted a causal analysis.

NASA Causal Analysis|
 | Sales|  | Profits|
Actual| 63239| | -876|
Budget| 58660| | 2005|
Actual B/W budget| 4579|  | -2881|
Causal analysis| | |  |
Third party sales| 5180|  | 2081|
Pricing| -358| | -358|
Diversified/Delivery| -243|  | -243|
Variances| | |  |
Variable cost adjustment|  |  | 54|
Variable efficiency variance| | | 241|
Fixed cost adjustment| | | 88|
Fixed spending variance| | | 498|
Production volume variance| | | -5250|
Interest| | | 25|
Period costs|  |  | -17|
Total| 4579|  | -2881|

As we can see from the above table, NASA achieved a favorable variance in sales, but not in profits. Therefore, one might start wondering if NASA experienced a problem in cost control. Among all the variances listed above, we can see that the production volume variance is the most unfavorable. Next our group conducted a fixed overhead variance analysis. Based on our calculation, the volume variance calculated in Exhibit 2 is accurate. The spending variance is positive, which is a good thing. However, the unfavorable production volume variance needs management's attention.

Actual cost| Flexible budget:| Allocated|
Incurred| Same Budgeted|  |  |  |
 |  | 44625/(85*9/12)*47.5=33250|
 |  | 44625/(55*9/12)*47.5=51386|
44127| 44625| 33250| 11375U|
 |  | 51386| 6125F|
498F| 5250U|

The production volume variance indicates the difference between the budgeted fixed manufacturing overhead costs and the allocated fixed manufacturing overhead costs. An unfavorable variance shows that the budgeted amount is higher than the allocated amount. In essence it means that the actual production volume is lower than the budgeted production volume. It also indicates that the company produces under capacity. As Pierre mentioned, Sarnia 2 has a demonstrated capacity of 85,000, but they only produced 65,000 last year.

From the interview with Choquette, we know that the transfers from NASA to EROW are at standard costs. NASA does not include a mark-up cost in transfer activity, thus no profit from that. The standard cost includes both variable and fixed cost. Specifically variable costs of transfer volume are not reflected in NASA financial results but included in EROW variable costs figures. Fixed cost are attached to each tonne transferred at $700 per unit. The computation is shown below:

Thus for EROW, it has to cover $700 cost besides variable production cost for every unit transferred from NASA. The $700 costs actually act like a variable cost to EROW.

NASA produce for EROW based on budget generated at September or October in previous year. From Exhibit 6, we can see the trend that in recent years the actual tonnes transferred to EROW is less than planned. However it will have no effect on NASA’s net contribution. Instead, the excess and the $700 fixed cost will be capitalized in ending F.G. inventory.

According to the above information, we could conclude that for EROW division, the best production strategy in terms of butyl is to produce itself as much as possible if the plant does not reach the top capacity. On one hand, the price is higher ($1975 compared to $1840 shown as below chart) while...
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