Preparation of flexible budgets Data Rivermede Ltd makes a single product called the Fasta. Last year, Steven Jones, the managing direc- tor of Rivermede Ltd, attended a course on budget- ary control. As a result, he agreed to revise the way budgets were prepared in the company. Rather than imposing targets for managers, he encouraged participation by senior managers in the preparation of budgets. An initial budget was prepared but Mike Fisher, the sales director, felt that the budgeted sales volume was set too high. He explained that setting too high a budgeted sales volume would mean his sales staff would be de-motivated because they would not be able to achieve that sales volume. Steven Jones agreed to use the revised sales volume suggested by Mike Fisher. Both the initial and revised budgets are repro- duced below complete with the actual results for the year ended 31 May.

As the management accountant at Rivermede Ltd, one of your tasks is to check that invoices have been properly coded. On checking the actual invoices for heat, light and power for the year to 31 May, you find that one invoice for 7520 had been incorrectly coded. The invoice should have been coded to materials. Task 1

(a) Using the information in the original and revised budgets, identify: the variable cost of material and labour per Fasta; the fixed and unit variable cost within heat, light and power.

(b) Prepare a flexible budget, including variances, for Rivermede Ltd after correcting for the miscoding of the invoice.

Data On receiving your flexible budget statement, Steven Jones states that the total adverse variance is much less than the 46 400 shown in the original statement. He also draws your attention to the actual sales volume being greater than in the revised budget. He believes these results show that a participative approach to budgeting is better for the company and wants to discuss this belief at the next board meeting. Before doing so, Steven Jones asked for your comments.

Task 2 Write a memo to Steven Jones. Your memo should:

(a) briefly explain why the flexible budgeting variances differ from those in the original statement given in the data to task 1;

(b) give two reasons why a favourable cost variance may have arisen other than through the introduction of participative budgeting;

(c) give two reasons why the actual sales volume compared with the revised budget's sales volume may not be a measure of improved motivation following the introduction of parti- cipative budgeting. AAT

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Rivermede Ltd - budgeted and actual costs for the year ended 31 May Fasta production Variances Original Revised Actual from revised and sales budget budget results budget (units) 24 000 20 000 22000 2000 (F) () () () () Variable costs Material 216000 180000 206 800 26 800 (A) Labour 288 000 240000 255 200 15 200 (A) 33 Semi-variable costs Heat, light and power 31000 27000 33400 6400 (A) Fixed costs Rent, rates and depreciation 40 000 40000 38 000 3 2000 (F) 575 000 487 000 533 400 46 400 (A) Assumptions in the two budgets 1. No change in input prices 2. No change in the quantity of variable inputs per Fasta