Realta Plc is a manufacturer of electrical components which has contracts to supply several major engineering contractors. The company's 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.

Realta operates twelve monthly budget periods for management control purposes. Set out below is a part of the master budget for Product NR12 for Period 10. This budget is based on normal annual operating capacity of 6,000 units evenly distributed over the year. Product NR12 was introduced eighteen months ago and the sales director is exploring new markets for its sale.

Budget for Period 10: Product NR12
	Per unit	Total
Selling price	100.00
Direct materials @ 2.50 per kg	4 kg
Machine time	30 minutes
Direct labour @ 15.00 per hour	120 minutes
Manufacturing overhead: variable with machine hours	2.00
Manufacturing overhead: fixed absorbed per unit of output		15,000

During Period 10 actual production and sales of NR12 totalled 520 units and the cost ledger summary shows:

Results for Period 10: Product NR12
Sales 520 units		51,800
Direct materials 3,010 kg used	5,300
Direct labour 1,080 hours paid for	15,600
Manufacturing overhead: variable	1,100
Manufacturing overhead: fixed	15,900
Total manufacturing costs incurred		37,900
Net income		13,900

Machines used recorded 290 hours on Product NR12 in Period 10.

• a.Prepare an overall budget production statement that shows both the original and the flexible budget for Product NR12 for Period 10. (Your performance report should be in a very similar format to Table 3.6 in Unit 2 Session 3. The only difference is to add a new column (a) at the beginning of the table which shows standard selling price, standard cost per unit (for each variable cost), standard contribution per unit, standard fixed cost per unit and standard profit per unit.) (Find table 3.6 photo below)
• b.In terms of management control, explain the benefit to Realta in using the standard cost information asked for in (a) above.
• c.The budget production statement in (a) above is based on the marginal costing system. Describe a market situation where it is appropriate for planned costs to be set and monitored on (i) a marginal costing basis and (ii) an absorption costing basis.
• d.Using absorption costing, what is the fixed overhead volume variance for Product NR12 in Period 10? Why is this variance relevant to absorption costing but not to marginal costing?

Table 3.6

Table 3.6: Overall budget production statement a b d e Original Flexed Actual Overall Activity budget budget variance variance Units 2,000 1,600 1,600 (a -c) (a - b) produced f f Direct 1,000 950 (A/F) (A/F) materials Direct 2,000 1,500 (A/F) (A/F) labour Variable 3,000 2,475 (A/F) (A/F) overheads Fixed 4,000 4,000 ) overheads e Activity Spend variance variance (a - b) (b-c) (A/F) (A/F) (A/F) (A/F) (A/F) (A/F) ) Table 3.6: Overall budget production statement a b d e Original Flexed Actual Overall Activity budget budget variance variance Units 2,000 1,600 1,600 (a -c) (a - b) produced f f Direct 1,000 950 (A/F) (A/F) materials Direct 2,000 1,500 (A/F) (A/F) labour Variable 3,000 2,475 (A/F) (A/F) overheads Fixed 4,000 4,000 ) overheads e Activity Spend variance variance (a - b) (b-c) (A/F) (A/F) (A/F) (A/F) (A/F) (A/F) )