ABMC3084 Information for control and decision making

Tutorial 7: Budgetary control

Question 1:
A company has obtained the following information regarding costs and revenue for the
past financial year:

Original budget:
Sales 10,000 units
Production 12,000 units
Standard cost per unit: RM
Direct material 5
Direct labour 9
Fixed production overheads 8
Total: 22

Selling price 30

Actual results:
Sales 9,750 units
Revenue RM325,000
Production 11,000 units
Material cost RM65,000
Labour cost RM100,000
Fixed production overheads RM95,000
There were no opening stocks.

Required:
a) Produce a flexed budget statement showing the flexed budget and actual results.
Calculate the variances between the actual and flexed figures for the following:
 Sales; (Answer: Sales price variance RM32.5-(F)
 Materials; (Answer: Materials variance RM10 (A)
 Labour; and (Answer:Labour variance RM1 (A)
 Fixed production overhead . (Answer:Fixed prodn OH variance RM1 (F)

b) Explain briefly how the sales and materials variances calculated in (a) may have
arisen.
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 ABMC3084 Information for control and decision making

Question 2:
You have been provided with the following operating statement, which represents an
attempt to compare the actual performance for the quarter which has just ended with the
budget:
Budget Actual Variance
Number of units sold (000s) 640 720 80

RM’ 000 RM’ 000 RM’ 000

Sales 1,024 1,071 47
Cost of sales (all variable)
Material 168 144
Labour 240 288
Overheads 32 36
440 468 (28)

Fixed labour cost 100 94 6

Selling & distribution costs:

Fixed 72 83 (11)
Variable 144 153 (9)

Administration costs:
Fixed 184 176 8
Variable 48 54 (6)
548 560 (12)
Net profit 36 43 7

Required:
a) Using a flexible budgeting approach, re-draft the operating statement so as to provide
a more realistic indication of the variances and comment briefly on the possible
reasons (other than inflation) why they have occurred.
Answer: Budget Actual Variance
Net Profit 85 43 (42)

b) Explain why the original operating statement was of little use to management.
c) Discuss the problems associated with the forecasting of figures which are to be used
in flexible budgeting.

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Question 3:
The following information relates to budget period 1 for Leysel Co:
Budget Budget Actual for period
(60,000 units) (90,000 units)
Sales(RM) 900,000 1,350,000 1,240,000
Raw materials(RM) 450,000 675,000 632,400
Labour(RM) 155,000 207,500 165,200
Production overheads(RM) 190,000 235,000 238,000

Actual production and sales in budget period 1 were 80,000 units. Actual labour costs
for the period included RM50,000 of fixed labour costs. Actual production overheads for
the period included RM110,000 of fixed production overheads.

Required:
a) Using a marginal costing approach, prepare a flexed budget for the period and
calculate appropriate variances in as much detail as allowed by the information
provided above.
ANSWER: Flexed (RM’000) Actual (RM’000) Variance (RM’000)
Gross profit 190 204.4 14.4 (F)

b) Explain how budgeting can help organisations to achieve their objectives.

Question 4:
It is argued that the budgetary control systems have behavioural problems.
It can lead to a lack of goal congruence, budget slacks and non-acceptance of budget
targets.
Briefly explain the above stated THREE (3) behavioural problems.

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 ABMC3084 Information for control and decision making

Question 4:

Lack of goal congruence

There is goal congruence in an organisation if employees are motivated to
engage in behaviour that is compatible with the goals of the organization.
However, when there are budgets set, employees may try to achieve the budget
at all costs even if this results in actions that are not in the best interests of the
organisation.

Budget slacks
Owing to pressure to meet the budget, employees may manipulate the data by
putting in budget slacks.Budget slacks relates to the process by which managers
seek to obtain budget targets that can be easily achieved by understating
revenues and/or overstating costs.

Non-acceptance of budget targets because:

- the targets set are considered too difficult
- employees are held responsible for outcomes over which they have little control
eg. the increase in price of raw material.