Page 165 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes
Actual - Std. input allowed
Solution: Variable OH Variance = × Budgeted Rate
Actual output

=

[Budgeted Rate per hour = ]

= 1,14,400 – 1,03,200
= 11,200 (A)

Efficiency Variance = (Std. Input hour – Actual hours)  Budgeted Rate
1,29,000
= (40,312.5 – 43,000)  2.56 [ = 40312.5]
3.2
= 6,880 (A)

Exp./Spending Variance = Actual input x Budgeted Rate – Actual OH
= 43,000  2.56 – 1,14,400
= 1,10,080 – 1,14,400

= 4,320 (A)

7.10 Management Action

The cardinal principle in analyzing formal financial reports is that the monthly report should
contain the major surprises. Significant information should be communicated by telephone, fax,
electronic mail or personal meetings as soon as it becomes known. The formal report confirms
that senior managers have learned about the specifics and have taken action prior to the receipt
of the formal report.
The importance of formal reporting is that it provides the desirable pressure in subordinate
managers to take corrective action on their own. Further, the formal report provides more
accurate information and provides a basis for analysis as compared to informal sources which is
general and unprecise.
Usually, there is a discussion between the business unit manager and his or her superior, in
which business unit manager explains the reasons for significant variances. The action being
taken to correct unfavourable situations and the expected timing of each corrective action. These
explanations are necessarily subjective and they may be biased. Operating managers like most
people, don’t like to admit that unfavourable variances are caused by their errors. A senior
manager, based on experience, can judge whether the business unit manager is frank and
forthcoming and accordingly view the report.
A profit report does not carry any meaning unless they lead to action. The action may be by way
of praise for the job well done. Suggestions for doing things differently or more drastic personnel
actions. However, these actions are by no means taken for every business unit every month.
As long as business is going well, praise is the most that may be necessary.

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