A construction company engaged in heavy civil engineering work prepares at the beginning of each year a financial budget for its contract department. The situation existing at 1 January is as follows:

Contract	Fixed tender price	Period of work
1	£180 000	1 Jan to 31 Dec
2	£480 000	1 Jan to 31 Dec
3	£120 000	1 Jan to 31 Dec

However, the company is at present negotiating a further contract valued at £180 000 to commence on 1 April with a duration of 12 months. Each of these contracts includes an allowance to cover head‐office (HO) overheads and profit as indicated in Table Q1.1. 

Table Q1.1 Budgeted sum for overheads and profit.

Contract	HO overheads (£)	Profit (£)	Total
1	8 000	10 000	(Represents 10% of sales)
2	20 000	28 000
3	6 000	6 000
4	6 000	12 000
Total	£40 000	£56 000	£96 000

 

The budget is reviewed six months later, to reveal the following position at 30 June: 

Contract	Value of work done (£)	Direct cost to date (£)
1	90 000	84 000
2	240 000	220 000
3	50 000	40 000
4	Contract did not materialise

   

The actual cost of HO overheads to date on each contract is £5000.

(1) Assuming that the value of the work in each project can be spread uniformly throughout its duration, prepare a budget for the year.

(2) Contract 4 did not materialise; thus, HO overheads and profit will be under‐recovered as a result of this shortfall in obtaining contracts. Calculate the company sales and overhead variances, and the total variance on each contract at 30 June and thereby obtain the actual profit and compare it with that budgeted.

(3) What action should management take on the basis of the figures?