Question 2

Read through the information below and answer the questions that follow.

Beta Plc is a manufacturer of electrical components which has contracts to supply several major engineering contractors. The companys objectives include the aim of operating profitably overall, although the Directors accept that results of individual products will vary according to the competitiveness of markets. Targets are therefore set for each individual product and market.

Beta operates twelve monthly budget periods for management control purposes. Set out below is a part of the master budget for Product ZB6 for Period 8. This budget is based on normal annual operating capacity of 9,000 units evenly distributed over the year. Product ZB6 was introduced a number of years ago and although the Sales Director is exploring new markets for its sale it is now seen by the Marketing Director as a cash cow.

Budget for Period 8: Product ZB6
	Cost	Per unit	Total
Selling price		150
Direct materials	2 per kg	3kg
Direct labour	15 per hour	90 minutes
Variable machine costs	4 per hour	60 minutes
Fixed overheads			22,500

Results for Period 8: Product ZB6
Sales		770 units	118,800
Direct materials		3,010kg	5,300
Direct labour		1,080 hours	15,600
Variable machine costs			2,700
Variable costs			23,600
Contribution			95,200
Fixed overheads			26,000
Operating profit			69,200

a. Prepare an overall budget production statement that shows both the original and the flexed budget for Product ZB6 for Period 8. Your performance report should follow the format set out below. (23 marks)

a.

b. In terms of management control of material, explain the benefit to Beta of using standard material cost information per unit in variance analysis. (3 marks)

c.

i. Calculate the total material variance for ZB6 for Period 8.

ii. Calculate the material price and usage variances for ZB6 for Period 8.

iii. Comment on what management actions might Beta might take to improve management control of materials given the price and usage variances calculated in c(ii) above.

d. The budget production statement you prepared in (a) above is based on the marginal costing system. Given the information on Beta, discuss how it may be more appropriate for planned revenues and costs to be set and monitored on an absorption costing basis.