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2683 words - 11 pages

This series of financial management case studies will be based around the business of
Coverdrive Ltd, a manufacturer of high quality, hand made cricket bats.
Coverdrive Ltd is based in Whitby North Yorks and is an owner-managed company. It
had been originally formed in the early 1980’s as a partnership with the aid of some
European funding.
It currently has a budgeted turnover of £2.75m with anticipated profit for the year of
This first case study focuses on the concept of standard costing, variance analysis and
the reconciliation of budget to actual profit through an analysis of the main cost
The scenario assumes ...view middle of the document...

To control costs by establishing standards and analysing variances.

To enable the principle of ‘management by exception’ to be practised at the
detailed, operational level.

To assist in setting budgets.

The standard costs are readily available substitutes for actual average unit costs
and can be used for stock and work-in-progress valuations, profit planning and
decision making, and as a basis for pricing where ‘cost-plus’ systems are used.

To assist in assigning responsibility for non-standard performance in order to
correct deficiencies or to capitalise on benefits.

To motivate staff and management.


To provide a basis for estimating.

To provide guidance on possible ways of improving performance”.

In addition to the objectives stated by Lucy it can be said that, it can be the basis for
‘good practice’ in establishing not only cost control but cost reduction programmes.
In ‘activity based’ environments it can, by forcing a review of good practice, help in
identifying activities and cost drivers.
An activity is defined as “a value adding process which consumes resources”.
A cost driver is “an activity or factor which generates cost”.
Variance Accounting
This is defined as “A method by which planned activities (quantified in budgets, standard
costs, standard sales and standard profits) are compared with actual results. Provides a
basis for variance analysis”.
Variance analysis being “The analysis of performance by means of variances; used to
promote management action at the earliest possible stages”. (CIMA)
Control through Variance Accounting
The primary objective of standard costing technique is to monitor current performance
against predetermined standards by the use of variance analysis.
Flexible budgetary control uses the same principles but standard costing informs a more
detailed analysis of variances.
Variance analysis directs management attention to the reasons underpinning
off-standard performance, so that corrective action is taken as early as possible.
Direct action can result in improved efficiency, greater utilisation of resources and in
some cases reduction in cost.
Reporting systems should detail variances in such a way that through the mechanism of
“responsibility accounting” individual managers should be held accountable for the
specific variances.
The objectives and principles outlined above are those which underpin the accounting
methods and techniques visited in this case study.


Financial Management Case Study (1)
Variance Accounting and Reporting
The purpose of this case study is to illustrate the principles of standard absorption
costing and the reconciliation process of matching budget to actual performance by the
use of variance analysis.
A traditional approach to the variance analysis model is based on the following:
(1) Direct Labour Cost...

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