Advanced : Reconc iliation of budgeted and actual profits Amalgamated Processors pte is a divisionalized organization which operates a standard costing and budgetary planning and control system in which the preparation of detailed operating budgets is undertaken by the divisions themselves after centrally determined profit targets have been commumcated to them.

The Penbrock Division of the company produces and sells a standardized component which is sold externally at £10 per unit and internally, to other divisions, at a transfer price of £9 per unit.

The standard specification for this product is as follows:

The fixed manufacturing overhead is absorbed on the basis of the 'normal' monthly output of 15000 units. The selling and distributive overhead relates solely to extermal sales and the monthly divisional budget for this comprises a fixed element of £9600 and a variable element of £0.20 for each unit of budgeted extermal sales. The fixed selling and distributive overhead has been unitised assuming a 'normal' monthly external sales level of 12 000 units. The ·central office charge' element of the standard specification relates to a charge made by the 'head office· for central services provided- this has also been unitised assummg the normal monthly activity level of 15000 units. Unsold stock is carried at standard manufacturing cost.
The following details apply to the Penbrock Division for April 1982:

The ·actual' cost of goods manufactured can be analysed as follows:

The stores records of the Penbrock Division are kept at standard cost so that the material cost figures include both the cost of the actual direct materials used {pnced at their standard cost) and the price variance on materials purchased during April. The details of usage and purchases are as follows:

The workstaff have complained that the quality of the most recently purchased batch of Material A is inferior to the regular grade, that it gives rise to more waste and that it requires more time to process.
You are required:

(a) to prepare a statement, for the general manager of the Penbrock DIVISIOn, analysing the reasons for the profit shortfall of £12 000 and to provide a commentary on this statement: (16 marks)

(b) to comment on the practice of isolating material price variances at the time of the material's purchase: (3 marks)

(c) to comment on the transfer pricing method used by the Penbrock Division.

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Standard specification 2m of material A at 0.20 per m 5 units of component B at 0.37 per unit 15 minutes of labour at 2.00 per hour () 0.40 1.85 0.50 Variable manufacturing overhead- 150% of direct labour cost 0.75 Fixed manufacturing overhead 1.50 Standard unit manufacturing cost 5.00 Central office charge 1.00 Selling and distributive overhead 1.00 Standard unit cost 7.00