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Analysis of Polysar
Analysis of Polysar
Teaching Case
Polysar Ltd.
AGENDA
Polysar Ltd.
• Introduction to Polysar
• Standard Costing
• Variance Analysis for Variable
Costs
• Fixed Overhead Volume Variance
• Transfer Pricing
AGENDA
Polysar Ltd.
• Introduction to Polysar
• Standard Costing
• Variance Analysis for Variable
Costs
• Fixed Overhead Volume Variance
• Transfer Pricing
POLYSAR
• Canada’s largest chemical company.
• The Rubber Group accounts for 46% of Polysar’s sales.
• Primary products for this group are butyl and
halobutyl.
• Principal customers for these products are tire
manufacturers.
• Rubber Group has two divisions
– NASA (North America & South America)
– EROW (Europe & elsewhere)
POLYSAR
• Butyl is manufactured by NASA at its Sarnia 2 plant,
and by EROW at its Antwerp plant.
• Sarnia 2 is a relatively new facility, dedicated entirely
to butyl production.
• The Antwerp plant makes both butyl and halobutyl.
• EROW’s demand exceeds its manufacturing capacity,
so EROW “buys” butyl from NASA.
POLYSAR
R U B B E R G R O U P
N A S A E R O W
S A R N I A S1 A P R L NA IN A T A 2 N P T L W A NE TR
H a l o b u t y l B u t y l B u t y l & H
AGENDA
Polysar Ltd.
• Introduction to Polysar
• Standard Costing
• Variance Analysis for Variable
Costs
• Fixed Overhead Volume Variance
• Transfer Pricing
POLYSAR
1a) What evidence do we have that Polysar is
on a standard costing system?
Septem
ber1986
9MonthsendedSept. 30,1986
A ctual B udget Deviation
(‘000's) (‘000's) (‘000's)
SalesR evenue-T hirdParty 65,872 61,050 4,822
-D iversifiedProduct Group 160 210 - 50
-Total 66,032 61,260 4,722
DeliveryC ost -2,793 -2,600 - 193
Net SalesR evenue 63,239 58,660 4,579
VariableC osts
Standard -22,589 -21,450 -1,139
C ost Adjustm ents 54 - 54
EfficiencyV ariance 241 - 241
Total -22,294 -21,450 - 844
FixedC osts
Standard -25,060 -23,100 -1,960
C ost Adjustm ents 168 80 88
SpendingV ariance 498 - 498
V olum eV ariance -11,375 -6,125 -5,250
Total -35,769 -29,145 -6,624
G rossProfit - $ 5,176 8,065 -2,889
PeriodC osts
A dm inistration, Selling, Distribution -4,163 -4,000 - 163
Technical Service - 222 - 210 - 12
O therIncom e/Expense 208 50 158
Total -4,177 -4,160 - 17
Septem
ber1986
9MonthsendedSept. 30,1986
A ctual B udget Deviation
(‘000's) (‘000's) (‘000's)
SalesR evenue-T hirdParty 65,872 61,050 4,822
-D iversifiedProduct Group 160 210 - 50
-Total 66,032 61,260 4,722
DeliveryC ost -2,793 -2,600 - 193
Net SalesR evenue 63,239 58,660 4,579
VariableC osts
Standard -22,589 -21,450 -1,139
C ost Adjustm ents 54 - 54
EfficiencyV ariance 241 - 241
Total -22,294 -21,450 - 844
FixedC osts
Standard -25,060 -23,100 -1,960
C ost Adjustm ents 168 80 88
SpendingV ariance 498 - 498
V olum eV ariance -11,375 -6,125 -5,250
Total -35,769 -29,145 -6,624
G rossProfit - $ 5,176 8,065 -2,889
PeriodC osts
A dm inistration, Selling, Distribution -4,163 -4,000 - 163
Technical Service - 222 - 210 - 12
O therIncom e/Expense 208 50 158
Total -4,177 -4,160 - 17
Septem
ber1986
9MonthsendedSept. 30,1986
A ctual B udget Deviation
(‘000's) (‘000's) (‘000's)
SalesR evenue-T hirdParty 65,872 61,050 4,822
-D iversifiedProduct Group 160 210 - 50
-Total 66,032 61,260 4,722
DeliveryC ost -2,793 -2,600 - 193
Net SalesR evenue 63,239 58,660 4,579
VariableC osts
Standard -22,589 -21,450 -1,139
C ost Adjustm ents 54 - 54
EfficiencyV ariance 241 - 241
Total -22,294 -21,450 - 844
FixedC osts
Standard -25,060 -23,100 -1,960
C ost Adjustm ents 168 80 88
SpendingV ariance 498 - 498
V olum eV ariance -11,375 -6,125 -5,250
Total -35,769 -29,145 -6,624
G rossProfit - $ 5,176 8,065 -2,889
PeriodC osts
A dm inistration, Selling, Distribution -4,163 -4,000 - 163
Technical Service - 222 - 210 - 12
O therIncom e/Expense 208 50 158
Total -4,177 -4,160 - 17
• Introduction to Polysar
• Standard Costing
• Variance Analysis for Variable
Costs
• Fixed Overhead Volume Variance
• Transfer Pricing
POLYSAR
1d) Evaluate NASA’s performance
relative to budget for sales price
and volume.
Exhibit 2
NA SARU BB ERD IVISIO N
RegularB utylRubber
StatementofN etContribution
Septem
ber1986
9MonthsendedSept. 30,1986
A ctual B udget Deviation
(‘000's) (‘000's) (‘000's)
SalesR evenue-T hirdP arty 65,872 61,050 4,822
-DiversifiedProduct Group 160 210 - 50
-Total 66,032 61,260 4,722
DeliveryC ost -2,793 -2,600 - 193
NetSalesR evenue 63,239 58,660 4,579
VariableC osts
Standard -22,589 -21,450 -1,139
C ost Adjustm ents 54 - 54
EfficiencyV ariance 241 - 241
Total -22,294 -21,450 - 844
FixedC osts
Standard -25,060 -23,100 -1,960
C ost Adjustm ents 168 80 88
SpendingV ariance 498 - 498
V olum eV ariance -11,375 -6,125 -5,250
Total -35,769 -29,145 -6,624
G rossProfit - $ 5,176 8,065 -2,889
PeriodC osts
A dm inistration, Selling, Distribution -4,163 -4,000 - 163
Technical Service - 222 - 210 - 12
O therIncom e/Expense 208 50 158
Total -4,177 -4,160 - 17
NASAR U B BE RD IVISIO N
RegularB utylRubber
StatisticsandA nalyses
Septem
ber1986
9MonthsendedSeptem
ber30,1986
Volume-Tonnes A ctual B udget Deviation
(‘000's) (‘000's) (‘000's)
Sales 35.8 33.0 2.8
Transfers
to E ROW 12.2 19.5 -7.3
from EROW 2.1 1.0 1.1
ProductionCosts ($‘000's) ($‘000's) ($‘000's)
FixedCost-D irect -21,466 -21,900 434
-AllocatedCash - 7,036 - 7,125 89
-AllocatedNon-Cash -15,625 -15,600 - 25
FixedCosttoProduction -44,127 -44,625 498
Sales Volume:
Budgeted: 33,000 tons
Actual: 35,800 tons
Septem
ber1986
9MonthsendedSept. 30,1986
A ctual B udget Deviation
(‘000's) (‘000's) (‘000's)
SalesR evenue-T hirdParty 65,872 61,050 4,822
-D iversifiedProduct Group 160 210 - 50
-Total 66,032 61,260 4,722
DeliveryC ost -2,793 -2,600 - 193
Net SalesR evenue 63,239 58,660 4,579
VariableC osts
Standard -22,589 -21,450 -1,139
C ost A djustments 54 - 54
E fficiencyV ariance 241 - 241
Total -22,294 -21,450 - 844
FixedC osts
Standard -25,060 -23,100 -1,960
C ost Adjustm ents 168 80 88
SpendingV ariance 498 - 498
V olum eV ariance -11,375 -6,125 -5,250
Total -35,769 -29,145 -6,624
G rossProfit - $ 5,176 8,065 -2,889
PeriodC osts
A dm inistration, Selling, Distribution -4,163 -4,000 - 163
Technical Service - 222 - 210 - 12
O therIncom e/Expense 208 50 158
Total -4,177 -4,160 - 17
Septem
ber1986
9MonthsendedSept. 30,1986
A ctual B udget Deviation
(‘000's) (‘000's) (‘000's)
SalesR evenue-T hirdParty 65,872 61,050 4,822
-D iversifiedProduct Group 160 210 - 50
-Total 66,032 61,260 4,722
DeliveryC ost -2,793 -2,600 - 193
Net SalesR evenue 63,239 58,660 4,579
VariableC osts
Standard -22,589 -21,450 -1,139
C ostA djustm ents 54 - 54
EfficiencyV ariance 241 - 241
Total -22,294 -21,450 - 844
FixedC osts
Standard -25,060 -23,100 -1,960
C ost Adjustm ents 168 80 88
SpendingV ariance 498 - 498
V olum eV ariance -11,375 -6,125 -5,250
Total -35,769 -29,145 -6,624
G rossProfit - $ 5,176 8,065 -2,889
PeriodC osts
A dm inistration, Selling, Distribution -4,163 -4,000 - 163
Technical Service - 222 - 210 - 12
O therIncom e/Expense 208 50 158
Total -4,177 -4,160 - 17
S.P.
$54K FAVORABLE
“COST ADJUSTMENT”
EFFICIENCY
VARIANCE
A.P.
$22,294K $241K
ACTUAL COST FAV.
NASAR U B BE RD IVISIO N
R egularB utylRubber
StatisticsandA nalyses
September1986
9MonthsendedSeptem
ber30,1986
Volume-Tonnes A ctual B udget Deviation
(‘000's) (‘000's) (‘000's)
Sales 35.8 33.0 2.8
Transfers
to E ROW 12.2 19.5 -7.3
from EROW 2.1 1.0 1.1
ProductionCosts ($‘000's) ($‘000's) ($‘000's)
FixedCost-Direct -21,466 -21,900 434
-AllocatedCash - 7,036 - 7,125 89
-AllocatedNon-Cash -15,625 -15,600 - 25
FixedCosttoProduction -44,127 -44,625 498
Septem
ber1986
9MonthsendedSept. 30,1986
A ctual B udget Deviation
(‘000's) (‘000's) (‘000's)
SalesR evenue-ThirdParty 65,872 61,050 4,822
-D iversifiedProduct Group 160 210 - 50
-Total 66,032 61,260 4,722
DeliveryC ost -2,793 -2,600 - 193
Net SalesR evenue 63,239 58,660 4,579
VariableC osts
Standard -22,589 -21,450 -1,139
C ost Adjustm ents 54 - 54
EfficiencyV ariance 241 - 241
Total -22,294 -21,450 - 844
FixedC osts
Standard -25,060 -23,100 -1,960
C ost Adjustm ents 168 80 88
SpendingV ariance 498 - 498
V olum eV ariance -11,375 -6,125 -5,250
Total -35,769 -29,145 -6,624
G rossProfit - $ 5,176 8,065 -2,889
PeriodC osts
A dm inistration, Selling, Distribution -4,163 -4,000 - 163
Technical Service - 222 - 210 - 12
O therIncom e/Expense 208 50 158
Total -4,177 -4,160 - 17
Septem
ber1986
9MonthsendedSept. 30,1986
A ctual B udget Deviation
(‘000's) (‘000's) (‘000's)
SalesR evenue-T hirdParty 65,872 61,050 4,822
-D iversifiedProduct Group 160 210 - 50
-T otal 66,032 61,260 4,722
DeliveryC ost -2,793 -2,600 - 193
Net SalesR evenue 63,239 58,660 4,579
VariableC osts
Standard -22,589 -21,450 -1,139
C ostA djustments 54 - 54
E fficiencyV arian
ce 241 - 241
T otal -22,294 -21,450 - 844
FixedC osts
Standard -25,060 -23,100 -1,960
C ost Adjustm ents 168 80 88
SpendingV ariance 498 - 498
V olum eV ariance -11,375 -6,125 -5,250
Total -35,769 -29,145 -6,624
G rossProfit - $ 5,176 8,065 -2,889
PeriodC osts
A dm inistration, Selling, Distribution -4,163 -4,000 - 163
Technical Service - 222 - 210 - 12
O therIncom e/Expense 208 50 158
Total -4,177 -4,160 - 17
• Introduction to Polysar
• Standard Costing
• Variance Analysis for Variable
Costs
• Fixed Overhead Volume Variance
• Transfer Pricing
POLYSAR
Demonstrated Capacity
=
$44,625K .
85,000 tons per year x 9/12
=
$700 per ton
POLYSAR
3. Use the rate calculated above to show that
the following amounts have been calculated
correctly:
Actual:
$700/tonne x 35.8K tonnes = $25,060K
Budgeted:
$700/tonne x 33.0K tonnes = $23,100K
POLYSAR
Transfers to Finished Goods Inventory on
Exhibit 1
Actual:
$700 x (47.5 + 2.1 - 35.8 - 12.2) =
$700 x 1.6K tonnes = $1,120K
Budgeted:
$700 x (55 + 1 - 33 - 19.5) =
$700 x 3.5K = $2,450K
POLYSAR
Transfers to EROW on Exhibit 1
Actual:
$700/tonne x 12.2K tonnes = $8,540K
Budget:
$700/tonne x 19.5K tonnes = $13,650K
POLYSAR
4. Does Polysar close out variances to
Cost of Goods Sold, or allocate
variances between Cost of Goods Sold
and Inventory?
POLYSAR
In the previous question, we were able to
recalculate the fixed cost component of butyl
added to ending inventory, and butyl transferred
to EROW, using the budgeted $700 per ton rate.
Therefore, no variances are included in these
amounts, and all variances closed out to the
income statement (Exhibit 2). These variances
appear on the line items for “Cost Adjustments,”
“Spending Variance,” and “Volume Variance.”
POLYSAR
5. Using the information on Exhibit 1,
identify EROW’s rate for applying fixed
manufacturing costs to Butyl. What
might explain the difference in the
fixed overhead rates of the two
divisions?
POLYSAR
From the Budgeted column on Exhibit 1,
we know that NASA planned to take 1K
tonnes of butyl from EROW, at a cost
(i.e., fixed cost component) of $620K, or
$620 per ton.
EROW’s fixed cost rate of $620 is lower
than NASA’s rate of $700, probably
because EROW’s facility is older. Note
that the difference in rates cannot be due
to differences in capacity utilization.
POLYSAR
6. What do the budgeted and
actual volume variances of
$6,125 and $11,375
represent?
POLYSAR
Budget
Capacity for 9 mo.s of 63,750 tons
Budgeted production of 55,000
(63,750 - 55,000) x $700 = $6,125K
Actual
Capacity for 9 months of 63,750 tons
Actual production of 47,500
(63,750 - 47,500) x $700
= 16,250 x $700 = $11,375K
POLYSAR
7. Now assume NASA decided to use
budgeted utilization in the
denominator for calculating the fixed
cost rate. What would the rate be
now? What would the actual and
budgeted volume variances now be.
POLYSAR
Fixed Manufacturing Overhead
Budgeted Production
=
$44,625K .
55,000 tons
POLYSAR LIMITED–CONTROLLER’SGUIDE
DEFINITIONS
Demonstratedcapacity istheactualannualizedproductionofaplantwhichwas
requiredtorunfull out withinthelastfiscalyearforasufficientlylongperiodto
assessproductioncapabilityafteradjustingforabnorm allyloworhighunscheduled
shutdowns,scheduledshutdowns,andunusualorannualizeditem swhichim pacted
either favourably or unfavourably ontheperiod’sproduction. Theresulting
adjustedhistoricalbaseshouldbefurthermodifiedforchangesplannedtobe
im plementedwithinthecurrentfiscalyear.
b) W hereaplanthasneverbeenrequiredtorunfull out,demonstrated
capacitycouldbereasonablyconsideredas“nameplate”capacityafter
adjustingfor
September1986
9MonthsEndedSeptember30, 1986
SalesVolume --Tonnes 47,850
($’000's)
SalesRevenue 94,504
DeliveryCost - 4,584
Net SalesRevenue 89,920
VariableCosts
Standard -28,662
PurchasePriceVariance 203
InventoryRevaluation - 46
EfficiencyVariance 32
Total -28,473
GrossMargin - $ 61,447
FixedCost toProduction
Depreciation - 4,900
Other -16,390
-21,290
Transfersto/fromF.G.Inventory - 775
Transfersto/fromN ASA - 7,238
-29,303
GrossProfit - $ 32,144
PeriodCosts - 7,560
BusinessContribution 24,584
Interest onW orkingCapital - 1,923
Net Contribution 22,661
S
cheduleofRegularButylShipmentsfromNASAto EROW
Actual Budget
Tonnes Tonnes
Fixedcostsw ereallocatedtoproductionbasedonaplant’s“dem
onstrated
capacity”usingthefollowingform ula,
VolumeVariance = StandardFixedCostperTonne
x (ActualTonnesProduced -DemonstratedCapacity)
Producttransfersbetw eendivisionsforperformanceaccountingpurposes
w erem adeatstandardfullcost,representing,foreachtonne,thesumofstandard
variablecostandstandardfixedcost.
Exhibit 2
NA SARU BB ERD IVISIO N
RegularB utylRubber
StatementofN etContribution
Septem
ber1986
9MonthsendedSept. 30,1986
A ctual B udget Deviation
(‘000's) (‘000's) (‘000's)
SalesR evenue-T hirdParty 65,872 61,050 4,822
-D iversifiedProduct Group 160 210 - 50
-Total 66,032 61,260 4,722
DeliveryC ost -2,793 -2,600 - 193
Net SalesR evenue 63,239 58,660 4,579
VariableC osts
Standard -22,589 -21,450 -1,139
C ost Adjustm ents 54 - 54
EfficiencyV ariance 241 - 241
Total -22,294 -21,450 - 844
FixedC osts
Standard -25,060 -23,100 -1,960
C ost Adjustm ents 168 80 88
SpendingV ariance 498 - 498
V olum eV ariance -11,375 -6,125 -5,250
Total -35,769 -29,145 -6,624
G rossProfit - $ 5,176 8,065 -2,889
PeriodC osts
A dm inistration, Selling, Distribution -4,163 -4,000 - 163
Technical Service - 222 - 210 - 12
O therIncom e/Expense 208 50 158
Total -4,177 -4,160 - 17
NASAR U B BE RD IVISIO N
RegularB utylRubber
StatisticsandA nalyses
Septem
ber1986
9MonthsendedSeptem
ber30,1986
Volume-Tonnes A ctual B udget Deviation
(‘000's) (‘000's) (‘000's)
Sales 35.8 33.0 2.8
Transfers
to E ROW 12.2 19.5 -7.3
from EROW 2.1 1.0 1.1
ProductionCosts ($‘000's) ($‘000's) ($‘000's)
FixedCost-D irect -21,466 -21,900 434
-AllocatedCash - 7,036 - 7,125 89
-AllocatedNon-Cash -15,625 -15,600 - 25
FixedCosttoProduction -44,127 -44,625 498