Question 6 Rodrigo has decided to set up a business selling tablets. He has rented a small shop to sell the tablets and tablets' accessories. Rodrigo has drawn up the following budget for his first financial year: 230,000 Income Direct costs: Purchase of tablet 60,000 10,000 Cost of other tablets' accessories Staff wages Operating costs (power etc) Total direct costs 15,000 17,000 102,000 Indirect overhead costs: Manager's pay 25,000 Shops expenses 15,000 Marketing expenses 40.000 Vehicle running costs 10,000 Total indirect overheads 90,000 Total costs Anticipated profit 192,000 38,000 Rodrigo tried to manage the business using this budget which he prepared well in advance of the start of the year. Rodrigo was determined to look at and find reasons for all variances from his carefully prepared budget The final actual figures were as follows: 1. Income 210,000. Sales were significantly below budget. There was reduced demand of newly realised tablets due to their relatively high prices. II. Purchase of tablets 65,000. A local shortage of tablets meant Rodrigo had to pay a higher price to local wholesalers. III. Cost of tablets' accessories was 7,000 as Rodrigo found a low-cost supplier IV. Staff wages 25,000. The manager, Aminah, managed to find some willing shop assistants who were paid the minimum wage. Unfortunately, they weren't very well-trained and she had to find better staff who had to be paid more. This extra cost wasn't budgeted. V. Operating costs 10,000. The price of electricity and water went down during the year. VI. Managers' pay 20,000. Rodrigo cut the manager's bonus. VII. Shop expenses 10,000. Cost savings were successfully implemented. VIII. Marketing and distribution 45,000. An advertising campaign was run to try to increase sales. IX. Vehicle running costs was 6,000. You are required to: a) Prepare a clearly set out variance analysis of the firm, comparing the budget figures with the actual results. State the variances and explain whether they are adverse or favourable. [12 marks] b) Reconcile the actual profit to the budgeted profit figure. [3 marks) c) Evaluate Rodrigo's use of budgets and control through variance analysis [5 marks] (Total 20 marks)