Question

Q3. (a) Distinguish between 'budgetary planning' and 'budgetary control (4 marks) (b) Why should organisations ensure that they have robust budgeting processes? (4 marks) (c) Flexible budgets have been prepared for two output levels as follows Production and sales (units) 25000 40000 Sales revenue 500000 800000 Direct materials Direct labour Depreciation Maintenance 200000 150000 3500 3000 320000 240000 3500 3600 Total costs 356500 567100 Profit 143500 232900 Actual production and sales were 36000 units and actual costs and revenues were Sales revenue 710000 Direct materials Direct labour Maintenance costs Depreciation Total costs 292000 215000 3600 3500 514100 Profit 195900 Required (i) Using a marginal cost format prepare a flexible budget for 36,000 units and show all the variances, indicating which are favourable and which are adverse (7 marks) Suggest a possible reason for each variance. What advice would you give to the production manager? (ii) (5 marks)

Answer 1

1a)
Budgeting planning is a process of setting revenue and expenses before
execution to achieve a target for a specific period.
Budgeting control is the process of following the budgetary planning and
comparing the budget with actuals and made the adjustment of variances
occurred.
1b) The organisations should ensure to have a robust budgeting processes because
if any process is being left-out while budgeting, it will prohibit the company
to achieve the budgetary goals.
1c) Flexible budgeting and variances :
		Flexible budget	Actual	Variance	F/U/N
Production and sales (units)		36000	36000
Sales reve.		720000	710000	-10000	U
Direct materials		288000	292000	4000	U	200000*36000/25000
Direct labour		216000	215000	-1000	F	150000*36000/25000
Depreciation		3500	3500	0	N	Fixed cost
Maintenance-variable	1440					Semi variable = (3600-3000)*36000/(40000-25000)
Maintenance - fixed	2000	3440	3600	160	U	3000 - (0.04 * 25000)
Total costs		510940	514100	3160	U
Profit		209060	195900	-13160	U
REASONS OF EXCESS COST:
1) Selling Price : The selling price should not be discounted.
2) Direct Materials : Wastage and over price of material should be controled.
3) Maintenance costs : overtime and wastage should be controlled.