Intermediate: Preparation of flexible budgets Data Rivermede Ltd makes a single product called the Fasta. Last year,
Question:
Intermediate: 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. Fie 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 Technicians Stage 16.39* Intermediate: Demand forecasts and preparation of flexible budgets Data Happy Holidays Ltd sells holidays to Xanadu through newspaper advertisements. Tourist are flown each week of the holiday season to Xanadu, where they take a 10 day touring holiday. In 2000, Happy Holidays began to use the least- squares regression formula to help forecast the demand for its holidays.
You are employed by Happy Holidays as an accounting technician in the financial controller’s department. A colleague of yours has recently used the least-squares regression formula on a spread¬ sheet to estimate the demand for holidays per year. The resulting formula was:
y — 640 + 40x where y is the annual demand and x is the year. The data started with the number of holidays sold in 1993 and was identified in the formula as year 1. In each subsequent year the value of x increases by 1 so, for example, 1998 was year 6. To obtain the weekly demand the result is divided by 25, the number of weeks Happy Holidays operates in Xanadu.
Task 1
(a) Use the least-squares regression formula developed by your colleague to estimate the weekly demand for holidays in Xanadu for 2001.
(b) In preparation for a budget meeting with the financial controller, draft a brief note. Your note should identify three weaknesses of the least-squares regression formula in forecast¬ ing the weekly demand for holidays in Xanadu.
Data The budget and actual costs for holidays to Xanadu for the 10 days ended 27 November 2000 is reproduced below.
The financial controller gives you the following additional information:
Cost and volume information • each holiday lasts 10 days;
• meals and hotel rooms are provided for each of the 10 days;
• the airline charges £450 per return flight per passenger for each holiday but the airline will only sell seats at this reduced price if Happy Holidays purchases seta in blocks of 20;
• the costs of coach hire, the tour guide and advertising are fixed costs;
• the cost of meals was budgeted at £12 per tourist per day;
• the cost of a single room was budgeted at £60 per day;
• the cost of a double room was budgeted at £70 per day;
• 38 tourists travelled on the holiday requiring 17 double rooms and 4 single rooms;
Sales information • the price of a holiday is £250 more if using a single room.
Task 2 Write a memo to the financial controller. Your memo should:
(a) take account of the cost and volume informa¬ tion to prepare a revised cost statement using flexible budgeting and identifying any vari¬ ances;
(b) state and justify which of the two cost state¬ ments is more useful for management control of costs;
(c) identify three factors to be taken into account in deciding whether or not to investigate individual variances.
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