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Budgetary Control Systems Answer To End of Chapter Exercises

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72 views3 pages

Budgetary Control Systems Answer To End of Chapter Exercises

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Jay Brock
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© © All Rights Reserved
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1

Chapter 7
Budgetary Control Systems
Answer to End of Chapter Exercises

Q 7.1 i)

Sound Sleepers
Standard Original Flexed Actual Variance
cost budget budget
Sales units 1 1,000 1,100 1,100

Sales 100 100,000 110,000 107,800 (2,200) a
Direct material 50 50,000 55,000 57,475 (2,475) a
Direct labour 12 12,000 13,200 15,750 (2,550) a
Fixed overheads 6 6,000 6,000 7,000 (1,000) a
Total cost 68,000 74,200 80,225 (6,025)
Profit 32 32,000 35,800 27,575 (8,225) a

Q 7.1 ii)

Budgeted profit 32,000
Sales volume variance 3,800 (F)
Budgeted profit at actual
volume 35,800
operating Favourable Adverse
variances:
Sales price 2,200
Direct material 2,475
Direct labour 2,550
fixed overhead 1,000

(8,225) (A)
Actual profit 27,575

Q 7.1 iii)
The adverse sales price variance could be due to general competitive pressures; a
desire on the part of the sales staff to gain more orders; accepting a low price to gain a
large order.
The favourable sales volume variance may be due to the lower price which led to a
2,200 adverse price variance, however it might also be due to favourable trading
conditions and a larger market size which has meant that it is easier for the sales team
of the company to achieve higher sales. Considered elsewhere on the book website is
the potential further analysis of the sales volume variance into a market size and
market share variance.
Direct materials may be due to a difference in the quantity of material being used than
standard or a difference in the price per kilogram to standard.
Direct labour may be due to a difference in the hours worked to standard or a
difference in the actual rate per hour to standard.
Material and labour variances can be analysed in more detail using a standard costing
system. This is discussed further in chapter 9.

2008 John Wiley & Sons Ltd.


www.wileyeurope.com/college/bowhill
2

Q 7.2 i)
Standard Original Flexed Actual Variance
cost budget budget
Sales units 1 12000 11500 11500

Sales 75 900000 862500 851000 (11,500) a
Direct material 30 360000 345000 350000 (5000) a
Direct labour 24 288000 276000 310000 (34,000) a
Total variable cost 54 648000 621000 660000 (39,000)
contribution 21 252000 241500 191000 (50,500) a
Fixed overheads 96000 96000 100000 (4000) a
Profit 156000 145500 91000 (54,500) a

Q 7.2ii)
Budgeted profit 156000
sales volume variance (10500) (a)
Budgeted profit at actual
volume 145500

operating variances: Favourable adverse


sales price 11500
direct material 5,000
direct labour 34,000
fixed overhead 4,000
54,500 (a)
Actual profit 91,000

All the variances are adverse and there are a range of possible reasons.
i) Possibly adverse trading conditions.
ii) Inaccurate budgeting
iii) Poor operational management
iv) A mixture of the above reasons.
The management accountant or other responsible person will need to investigate
possible reasons.

2008 John Wiley & Sons Ltd.


www.wileyeurope.com/college/bowhill
3

Q 7.3
Accounting statement could be improved:
- analysis by responsibility centre new cars, service department, parts
department. Discuss the relative benefits of establishing these as cost, revenue
or profit centres.
- Separation of controllable and uncontrollable overhead. What would these be?
- Presentation of information cumulative results; comparison v last year; %age
variances.
Reporting non-financial information. This could be number of new cars sold, number
of services carried out, against target

Further information:
Need to know sales by department. May need to have a transfer pricing system where
cars are taken in part exchange for new sales. If one is in place then care needs to be
taken in its design, as different methods of transfer pricing would have an impact
upon the profit of each department.
Need to know how garage overheads should be split by department if this is
considered necessary.
It is difficult to see how a comparison v flexible budget could be used for this
organisation.

Q 7.4
3) Empire corporation
original flexed
budget budget Actual Variance
units 10000 9000 9000
000 000 000 000
sales revenue 1200 1080 1100 20 (F)
Less expenses:
direct labour 400 360 378 (18) (A)
direct material 300 270 260 10 (F)
production overhead
variable 100 90 92 (2) (A)
fixed 50 50 58 (8) (A)
Contribution to
general overheads 350 310 312 2 (F)
Less allocated head
office costs 50 50 80 (30) (A)
Profit 300 260 232 (28) (A)

This is more relevant as it clearly identifies items that are controllable to the managers.
-Since head office costs are non-controllable they should be identified separately.
-Since a number of costs are variable, actual should be shown against flexed budget. It is
assumed that the cost vary in relation to units of output.
-Managers can employ the principle of management by exception whereby they investigate
the main variances. These might be the major variances in money terms of those which are
the most significant in terms of %ages. Additional information that would help managers
might include variance %ages; comparison of actual v budget for the cumulative situation or v
last years actual. -Non financial factors could be internal metrics - e.g. quality, manufacturing
cycle efficiency. Also customer metrics e.g. customer satisfaction and measures of
organisational learning. Relevant measures will be discussed further in parts 3 and 4 of the
book.

2008 John Wiley & Sons Ltd.


www.wileyeurope.com/college/bowhill

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