M plc designs, manufactures and assembles furniture. The furniture is for home use and therefore varies considerably in size, complexity and value. One of the departments in the company is the Assembly Department. This department is labour intensive; the workers travel to various locations to assemble and fit the furniture using the packs of finished timbers that have been sent to them.

Budgets are set centrally and they are then given to the managers of the various departments who then have the responsibility of achieving their respective targets. Actual costs are compared against the budgets and the managers are then asked to comment on the budgetary control statement.

The statement for April for the Assembly Department is shown below.

The Manager of the Assembly Department is new to the job and has very little previous experience of working with budgets but he does have many years’ experience as a supervisor in assembly departments. Based on that experience he was sure that the department had performed well. He has asked for your help in replying to a memo he has just received asking him to ‘explain the serious overspending in his department’. He has sent you some additional information about the budget:
1 The budgeted and actual assembly labour costs include the fixed salary of $2050 for the Manager of the Assembly Department. All of the other labour is paid for the hours they work.
2 The cost of furniture packs and other materials is assumed by the central finance office of M plc to vary in proportion to the number of assembly labour-hours worked.
3 The budgeted overhead costs are made up of three elements: a fixed cost of $9000 for services from central headquarters, a stepped fixed cost which changes when the assembly hours exceed 7000 hours, and some variable overheads. The variable overheads are assumed to vary in proportion to the number of assembly labour-hours. Working papers for the budget showed the impact on the overhead costs of differing amounts of assembly labour-hours:

The actual fixed costs for April were as budgeted.
Required

1 Prepare, using the additional information that the Manager of the Assembly Department has given you, a budgetary control statement that would be more helpful to him.
2 a Discuss the differences between the format of the statement that you have produced and that supplied by M plc;
b Discuss the assumption made by the central office of M plc that costs vary in proportion to assembly labour-hours.
3 Discuss whether M plc should change to a system of participative budgeting.

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Assembly labour-hours Budget 6 400 Assembly labour Furniture packs Other materials Overheads Total Actual Variance 7 140 $ $ $ 51 970 58 227 6 257 Adverse 224 000 205 000 19 000 Favourable 23 040 24 100 1 060 Adverse 62 060 112 340 50 280 Adverse 361 070 399 667 38 597 Adverse