Financial Reporting

• How would you classify a new assembly line?

  Solution

  • A.A use of working capital
  • B.A non-current asset
  • C.An expense
  • D.Inventory

  B. A non-current asset
• Which one of the following defines a cash deficit? 

  Solution

  • A.Where the cash inflows in a day are less than the cash outflows during the day
  • B.Where there are insufficient funds to invest in a new asset
  • C.Where the level of cash may be insufficient to meet outgoings
  • D.Where costs exceed revenues

  C. Where the level of cash may be insufficient to meet outgoings
• Which of the following actions would be most suitable to avoid the cash deficit? 

  Solution

  • A.Arrange a bank overdraft for the deficit quarters
  • B.Conserve cash by purchasing the new assembly line using a lease
  • C.Don’t make and sell e-bikes
  • D.Imposing longer payments on suppliers

  B.Conserve cash by purchasing the new assembly line using a lease
• What the efficiency variance means?

  Efficiency variance: The difference between the actual input (like labour hours or material usage) and the expected input (based on standard or budgeted norms) needed to produce a certain level of output.
• What does adverse variance mean?

  Adverse: This term indicates that the variance is unfavorable, meaning the actual performance was worse than expected. For example, it could mean that more hours were worked to produce a product than was planned or that more material was used to create the same amount of product.
• Reasons for adverse efficiency

  Equipment breakdowns disrupt the normal production process, causing a range of inefficiencies that increase the resources (like labour, time, and materials) needed to complete tasks.

  Low-quality materials which means requiring more time or effort to work with and may require more time, labour, and resources than originally planned and could lead to more scrap/waste.

  Inadequate training or skills means staff struggle to perform tasks as quickly or accurately as expected, which results in increased time, resources, and costs due to errors/supervision and overall slower task completion which led to overtime.
• What does idle time variance mean?

  Idle Time Variance (ITV) is the difference between the actual idle time experienced during production and the expected or standard idle time that was planned or budgeted for the same period. It measures how much unproductive time (when workers or equipment are idle) deviates from what was anticipated, helping businesses assess the efficiency of their operations.

  Idle Time Variance =

  (Actual Idle Time−Standard Idle Time)×Standard Rate
• Reasons for adverse idle time

  Equipment Breakdown or Malfunction

  Can cause workers or machines to be idle while waiting for repairs or maintenance.

  Material Shortages or Delays

  Supply chain disruptions or delays in receiving raw materials or components can result in idle time as workers wait for materials to arrive. If the required materials are unavailable, production cannot proceed.

  Production Bottlenecks

  A bottleneck occurs when one part of the production process is slower than others, causing delays in subsequent stages. When a bottleneck happens, workers downstream may be forced to wait for the bottlenecked process to catch up, leading to idle time.
• What does rate variance mean?

  Rate Variance refers to the difference between the actual rate paid (or charged) for a resource (typically labour or overhead) and the standard or budgeted rate that was expected or planned.

  Labour Rate Variance =(Actual Rate−Standard Rate)×Actual Hours Worked
• Reasons for adverse rate variance

  Higher Wages or Labour Costs

  When employees work overtime (often at a higher hourly rate), this increases the cost per labour hour. If overtime is higher than expected, the actual rate will be adverse.

  Material Price Increases

  Halfpenny had to source from other suppliers and they may have been more expensive suppliers, the actual rate paid may exceed the budgeted amount.

  Higher Overhead Costs

  Underestimating fixed costs: If fixed overhead costs (e.g., the need for Deep clean of contaminated equipment) were underestimated or increased during the period, the rate variance could turn adverse.
• Why should the packing team not be responsible for labour variance?

  Overtime pay is a common contributor to an adverse labor variance. If the packing team has to work overtime to meet order deadlines, the issue may stem from production schedules, order volumes, or labor shortages.

  Production Delays

  If there are delays earlier in the production process (e.g., having to deep clean equipment), these delays may push packing tasks to be rushed or extended beyond normal hours, requiring overtime.