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QUESTION 2 a) Individual managers are held responsible for investigating differences between budgeted and actual results, and are then expected to take corrective action or amend the plan in the light of actual events. The wrong approach to budgetary control is to compare actual results against a fixed budget. Consider the following example. Tree manufactures a single product, the bough. Budgeted results and actual results for June for the bough are shown below. Production and sales (Units) Budget for 1000 units (RM) Actual results for 2000 units Variance (RM) (RM) 37000 80000 43000 5000 6500 -1500 3000 4500 -1500 3600 4000 -400 Sales revenue Direct materials Direct labor Maintenance Depreciation Rent and rates Other costs Total costs Profit 4000 1000 3000 1500 1600 -100 5000 -1400 3600 20700 16300 22600 -1900 -41100 57400 In this example, the variances are meaningless for purposes of control. Costs were higher than budget because the volume of output was also higher (budgeted unit is 2000 units whereas actual is 3000 units); variable costs would be expected to increase above the budgeted costs. There is no information to show whether control action is needed for any aspect of costs or revenue. You are required to produce a flexible budget using marginal costing techniques based on the following information regarding cost behavior: i. Direct materials and maintenance costs are variable. ii. Although basic wages are a fixed cost, direct labor is regarded as variable in order to measure efficiency/productivity. Rent and rates and depreciation are fixed costs. iv. (Other costs consist of fixed costs of $1,600 plus a variable cost of $1 per unit made and sold 111