Question 26 Budgetary Control 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 overheads and profit as indicated in Table Q26.1. Table Q26.1 Budgeted sum for overheads and profit. Contract HO overheads (E) 1 8000 2 20000 3 6000 4 6000 Total 40000 Profit (D) Total 10000 (Represents 10% of sales) 28000 6000 12000 56000 96000 The budget is reviewed six months later, to reveal the following position at 30 June: Contract Value of work done () 1 90 000 2 240 000 3 50 000 4 Direct cost to date () 84 000 220 000 40 000 Contract did not materialise The actual cost of head-office 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?