Preparation of a flexible budget performance report The Viking Smelting Company established a division, called the reclamation division, 2 years ago, to extract silver from jewellers’ waste materials. The waste materials are processed in a furnace, enabling silver to be recovered. The silver is then further processed into finished products by three other divisions within the company.

A performance report is prepared each month for the reclamation division which is then discussed by the management team. Sharon Houghton, the newly appointed financial controller of the reclamation division, has recently prepared her first report for the 4 weeks to 31 May. This is shown below:

In preparing the budgeted figures, the following assumptions were made for May:
• The reclamation division was to employ four teams of six production employees.
• Each employee was to work a basic 42-hour week and be paid £7.50 per hour for the 4 weeks of May.
• Social security and other employment costs were estimated at 40 per cent of basic wages.
• A bonus, shared amongst the production employees, was payable if production exceeded 150 tonnes. This varied depending on the output achieved, as follows:
1. if output was between 150 and 199 tonnes, the bonus was £3 per tonne produced 2. if output was between 200 and 249 tonnes, the bonus was £8 per tonne produced 3. if output exceeded 249 tonnes the bonus was £13 per tonne produced.
• The cost of fuel was £75 per tonne.
• Consumables were £10 per tonne.
• Power comprised a fixed charge of £500 per 4 weeks plus £5 per tonne for every tonne produced.
• Overheads directly attributable to the division were £20,000.
• Plant maintenance was to be apportioned to divisions on the basis of the capital values of each division.
• The cost of Viking’s central services was to be shared equally by all four divisions.
You are the deputy financial controller of the reclamation division. After attending her first monthly meeting with the board of the reclamation division, Sharon Houghton arranges a meeting with you. She is concerned about a number of issues, one of them being that the current report does not clearly identify those expenses and variances that are the direct responsibility of the reclamation division.
Task 1 Sharon Houghton asks you to prepare a flexible budget report for the reclamation division for May in a form consistent with responsibility accounting.
On receiving your revised report, Sharon tells you about the other questions raised at the management meeting when the original report was presented. These are summarized below:
(i) Why are the budget figures based on 2-year-old data taken from the proposal recommending the establishment of the reclamation division?
(ii) Should the budget data be based on what we were proposing to do or what we actually did do?
(iii) Is it true that the less we produce the more favourable our variances will be?
(iv) Why is there so much maintenance in a new division with modern equipment and why should we be charged with the actual costs of the maintenance department even when they overspend?
(v) Could the comments, explaining the variances, be improved?
(vi) Should all the variances be investigated?

(vii) Does showing the cost of central services on the divisional performance report help control these costs and motivate the divisional managers?
Task 2 Prepare a memo for the management of the reclamation division. Your memo should answer their queries and justify their comments.

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Performance Report Reclamation Division 4 weeks to 31 May Actual Budget Variance Comments Production (tonnes) 200 250 50 (F)" () () () Wages and social 46,133 45,586 547 (A) Overspend security costs Fuel 15,500 18,750 3,250 (F) Consumables 2,100 2,500 400 (F) Power 1,590 1,750 160 (F) Divisional overheads 21,000 20,000 1,000 (A) Overspend Plant maintenance 6,900 5,950 Central services 7,300 6,850 950 (A) Overspend 450 (A) Overspend Total 100,523 101,386 863 (F) (A) adverse, (F) = favourable