ABC Manufacturers Ltd uses flexible budgets to plan for and control its operations. In the month of January 2011, the budget was established at 20,000 units. The budget incorporates materials cost that is totally variable at Sh.5 per unit. Similarly, labour cost is variable at Sh.3 per unit. Production overhead is partly variable at Sh.2.5 per unit and partly fixed at Sh.12,000 per month. Fixed production cost has been determined at Sh.2 for the planned production which is the normal activity level of the firm. Prepare the original and flexed budgets as well as the cost variances if 22,000 units are actually produced at a cost of Sh.100,000; Sh.72,000, Sh.70,000 and Sh.44,000 for materials, labor production overhead and fixed costs respectively [10 Marks]

b)

Discuss the relevance and limitations of budgeting for manufacturing businesses [10 Marks]