Page 5 - CIMA OCS August 2018 Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

Exercise 1(b) - Standard Costing and Variances

Variance Reason

Sales price Thomas Fine Teas has positioned its products at the premium end of the
variances market so can charge higher than average prices. However it offers
supermarkets promotional discounts and may be under pressure to reduce
prices as supermarkets only make “small margins” (p13).

Given this the Board needs to be wary of excessive price discounting as this
can undermine the brand.

Sales mix variance Different product lines have different margins (page 19) and consumer
behaviour is likely to involve substitution.
As a result a sales mix variance will help directors identify any trends in
purchasing habits – e.g. buying more green tea and less black tea.

Tea price variances TFT buys tea via an auction process. Excessive adverse price variances could
be the result of market forces but could lend weight to changing to having
direct supply agreements with major growers.

Tea mix variance A mix variance would reveal if more expensive tea leaves are being
substituted instead of cheaper ones in order to achieve the taste balance
required. This could indicate concerns over the quality of teas bought or
raise doubts over the competence of buyers or blenders.

Tea yield variance TFT expects to lose around 5% in volume from tea leaves to tea bags (p21).
A yield variance would indicate whether this is being achieved. Excessive
losses could suggest problems with quality (sacks are rejected) or problems
with the production line.

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