Ganga Sweets: Reading a Variance Before Punishing Anyone
Ganga Sweets makes sweets and savouries in a central kitchen in Hubballi and sells through three own outlets. The owner, Mr Patil, prepared a monthly budget and has just seen the actuals: sales ₹18,00,000 against a budget of ₹20,00,000; raw material ₹9,60,000 against ₹8,00,000; wages ₹2,10,000 against ₹2,00,000; electricity ₹58,000 against ₹60,000. Wastage in the kitchen has moved from the budgeted 4% to 9%. Mr Patil's response is a circular: all 40 cost heads must be reported to him daily, and the purchase clerk should be dismissed. He has also ordered zero wastage from Monday. The kitchen supervisor says he spends his evenings filling formats instead of checking the evening batch, and that ghee and dry fruits have become dearer this month. Sales fell mainly because a competitor opened an outlet near the main shop.
1. Prepare a comparison of budget and actual, compute the deviations, and identify which deviations deserve management attention and why. Apply management by exception and critical point control.
Read the worked answer
| Item | Budget (₹) | Actual (₹) | Deviation (₹) | Deviation (%) |
|---|---|---|---|---|
| Sales | 20,00,000 | 18,00,000 | 2,00,000 adverse | 10.0 |
| Raw material | 8,00,000 | 9,60,000 | 1,60,000 adverse | 20.0 |
| Wages | 2,00,000 | 2,10,000 | 10,000 adverse | 5.0 |
| Electricity | 60,000 | 58,000 | 2,000 favourable | 3.3 |
| Wastage | 4% | 9% | 5 percentage points adverse | - |
Management by exception means attending to deviations that are significant, not to all of them. On both absolute rupees and percentage, raw material is the exception: the largest gap and the largest percentage. Electricity is favourable and trivial, and can be ignored. Wages at 5% are worth a question but small in rupees.
Critical point control says a small error at a key point matters more than a large error elsewhere. Raw material is that key point: at budget it was 40% of sales (₹8,00,000 on ₹20,00,000). At actual it is 53% of sales (₹9,60,000 on ₹18,00,000).
The step Mr Patil has not taken - flexing the budget. Sales fell 10%, so material should have fallen too. At 40% of actual sales, material should have been ₹7,20,000; it was ₹9,60,000, an excess of ₹2,40,000 that volume does not explain. Material cost per rupee of sales rose from 40 paise to 53 paise.
But wastage does not explain all of it. At 9% wastage the wasted material is roughly ₹0.79 lakh; the extra 5 points over the budgeted 4% account for only about ₹0.5 lakh of the ₹2.4 lakh gap. The balance points to higher purchase prices, which the supervisor confirms, or to pilferage. Two causes, two different remedies.
2. Is Mr Patil's proposal to dismiss the purchase clerk and demand daily reports on all 40 cost heads sound? Answer with reference to the control process and its limitations.
Read the worked answer
The proposal confuses a deviation with a cause. Control runs in four steps: setting standards, measuring performance, comparing performance with standards, and taking corrective action. Mr Patil is jumping from comparison to punishment without doing the diagnosis in between.
On dismissing the clerk: the evidence points mainly to consumption on the kitchen floor and possibly to market prices for ghee and dry fruits. A purchase clerk does not control how much ghee goes into a batch. Dismissing him would be a corrective action aimed at the wrong variable, and it would teach the rest of the staff to hide figures rather than report them. If an enquiry later shows purchases above ruling market rates, act then - with evidence.
On daily reporting of 40 cost heads: this is the opposite of control by exception. It buries the one deviation that matters under thirty-nine that do not, and it consumes the supervisor's evenings in reporting instead of correcting. It also invites the standard limitations of control - resistance from employees, wasted effort on irrelevant figures, and reporting for the file rather than for action.
A better design:
- Report weekly on six or seven critical points - material yield, wastage percentage, sales per outlet, labour hours per kilogram, electricity per kilogram, debtor days.
- Investigate the material variance before any punitive action, separating price, wastage and pilferage.
- Trace material issues to the kitchen and shift so that responsibility is fixed where the loss occurs.
- Set a realistic wastage target with the kitchen team rather than decreeing zero from Monday.
- Revise the standard when sales fall 10% and when input prices move; a rigid budget is a poor yardstick in a seasonal business.
Control exists to correct, not to blame.