Question 2 (25 Marks)

The following budgeted figures have been taken from the cost records of Ace Ltd:

Production units9 00012 000

Capacity level75%100%

R R

Sales 1 035 000 1 380 000

Direct material (@ R5 per kg)180 000240 000

Direct labour (@ R20 per hour)225 000300 000

Factory overheads300 000330 000

Selling and administrative expenses180 000192 000

Normal capacity is equal to 12 000 units. As a result of the poor economic conditions the budget for February 2015 has been set at 80% of normal capacity. The company uses the absorption costing method for internal reporting purposes.

The following variance report for February 2015 has been presented to management of the production department:

	Fixed Budget	Actual Results	Variance
Production units	10 000	9 000
Sales units	10 000	9 000
	R	R	R
Sales	1 150 000	1 056 700	93 300 (a)
Material	200 000	188 100	11 900 (f)
Direct labour	250 000	236 250	13 750 (f)
Factory overhead	300 000	310 600	10 600 (u)
Selling and administrative expenses	180 000	208 200	28 200 (u)
Net profit	220 000	113 550	106 450 (u)

Required:

a) Discuss how a flexible budget can be used when exercising cost control. (5)

b) Critically discuss the format and content of the variance report for February 2015 as presented

to the department.

Prepare an alternative variance report for the department that would be more meaningful to management

Question 2 (25 Marks) The following budgeted figures have been taken from the cost records of Ace Ltd: 9 000 12 Production units 000 Capacity level 75% R 1 035 000 100% R 1 380 180 000 240 225 Sales 000 Direct material (@ R5 per kg) 000 Direct labour (@ R20 per hour) 000 300 000 Factory overheads 000 Selling and administrative expenses 000 192 000 300 000 330 180 Normal capacity is equal to 12 000 units. As a result of the poor economic conditions the budget for February 2015 has been set at 80% of normal capacity. The company uses the absorption costing method for internal reporting purposes. The following variance report for February 2015 has been presented to management of the production department: R Fixed Actual Variance Budget Results Production units 10 000 9000 Sales units 10 000 9 000 R R Sales 1 150 000 1 056 70093 300 (a) Material 200 000 188 100 11 900 (1) Direct labour 250 000 236 250 13 750 (1) Factory overhead |300 000 310 600 10 600 (0) Selling and administrative expenses 180 000 208 200 28 200 (u) Net profit 220 000 113 550 106 450 (u) Required: a) Discuss how a flexible budget can be used when exercising cost control. (5) b) Critically discuss the format and content of the variance report for February 2015 as presented to the department. Prepare an alternative variance report for the department that would be more meaningful to management Question 2 (25 Marks) The following budgeted figures have been taken from the cost records of Ace Ltd: 9 000 12 Production units 000 Capacity level 75% R 1 035 000 100% R 1 380 180 000 240 225 Sales 000 Direct material (@ R5 per kg) 000 Direct labour (@ R20 per hour) 000 300 000 Factory overheads 000 Selling and administrative expenses 000 192 000 300 000 330 180 Normal capacity is equal to 12 000 units. As a result of the poor economic conditions the budget for February 2015 has been set at 80% of normal capacity. The company uses the absorption costing method for internal reporting purposes. The following variance report for February 2015 has been presented to management of the production department: R Fixed Actual Variance Budget Results Production units 10 000 9000 Sales units 10 000 9 000 R R Sales 1 150 000 1 056 70093 300 (a) Material 200 000 188 100 11 900 (1) Direct labour 250 000 236 250 13 750 (1) Factory overhead |300 000 310 600 10 600 (0) Selling and administrative expenses 180 000 208 200 28 200 (u) Net profit 220 000 113 550 106 450 (u) Required: a) Discuss how a flexible budget can be used when exercising cost control. (5) b) Critically discuss the format and content of the variance report for February 2015 as presented to the department. Prepare an alternative variance report for the department that would be more meaningful to management