Intermediate: Preparation of flexible budgets and an explanation of variances You have been provided with the following operat¬ ing statement, which represents an attempt to compare the actual performance for the quarter which has just ended with the budget:

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.
(12 marks)

(b) Explain why the original operating statement was of little use to management. (2 marks)

(c) Discuss the problems associated with the forecasting of figures which are to be used in flexible budgeting.

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Budget Actual Variance Number of units sold (000s) 640 720 80 000 000 000 Sales 1024 1071 47 Cost of sales (all variable) Materials 168 144 Labour 240 288 Overheads 32 36 440 468 (28) Fixed labour cost 100 94 6 Selling and distribution costs: Fixed 72 83 (11) Variable 144 153 (9) Administration costs: Fixed 184 176 Variable 48 54 548 560 (12) Net profit 36 43 - (6) 7