The company lron and Steel A/S: Budgeting and variance analysis

The controller, Pia Hansen, has been asked to make a budget for December for the iron and steel company. Iron and Steel A/S produces steel fences in 1-meter modules and sells them on do-it-yourself markets. The expected sale in December is 80,000 meters at a selling price of DKK 143.00 per meter. In order to produce1 meter of steel fence, the production plant needs to melt 0.81 cubic meter of iron which is purchased from the supplier at the price of DKK 161 / cubic meter of steel. Fixed sales and administration costs are

estimated at DKK 600,000 of which DKK 150,000 are depreciations.

In regards to liquidity (cash flow), management Pia makes the following observations: Liquidity at the

beginning of December is DKK 1,250,000. On average 60% of the sale is collected within the month of sales and 40% in the next month. Regarding accounts payables, lron and Steel pays their suppliers 30% within the purchase month and 70% is within next month. All other expenses are paid within the same month.

In November, lron and Steel generated a sales revenue of DKK 12,500,000 and purchased cubic meters of steel in value of DKK 11,240,000.

Based on inventory controls, which show that there are 50,000 cubic meters of steel in the warehouse, the plant manager says that in order to fulfill December production plans and cover for the safety stock, Iron and Steel needs to purchase 70,000 cubic meters of steel at the beginning of the month.

Question 1: Prepare a liquidity (cash flow) budget for December for lron and Steel A/S.

Question 2: Then prepare an operating budget for December for lron and Steel A/S. (Please disregard other production costs such as direct wages and indirect production costs).

Question 3: Prepare furthermore an inventory valuation at the beginning and 'end of December for lron and steel A/S.

When December has passed, Pia Hansen looks back on the month to prepare a variance analysis. Actually,85,000 meters steel fences have been sold, at an average price of DKK 139.00 per meter. In the production,iron and Steel used in total 63,750 cubic meters of iron, at the total cost of 11,220,000 DKK. The fixed costs of the period, including depreciation, amounted to DKK 580,000.

Question 4: Construct a static variance analysis.

Pia Hansen is unsure about the variance analysis and feels that it is not detailed enough, and thereby not accurate. Therefore, she asks one of her employees, Sren Madsen, to take a closer look at this. SrenMadsen has learned that you are to separate volume and price in a variance analysis. Therefore, he will make a flexible budget.

Question 5: Prepare a flexible budget.

Question 6: Conduct a variance analysis and comment on the results. Your analysis should include:-your comments on the static budget variance

-your comments on the efficiency and price variance for direct materials usage

-your reflections upon the overall performance of the company

Question 7: Discuss general pros and cons regarding using budgeting as a planning tool, strategic alignment tool and motivation tool.

Assignment 3: The company Iron and Steel A/S: Budgeting and variance analysis (35%) The controller, Pia Hansen, has been asked to make a budget for December for the iron and steel company. Iron and Steel A/S produces steel fences in 1 meter modules and sells them on do-it-yourself markets. The expected sale in December is 80,000 meters at a selling price of DKK 143.00 per meter. In order to produce 1 meter of steel fence, the production plant needs to melt 0.81 cubic meter of iron which is purchased from the supplier at the price of DKK 161 / cubic meter of steel. Fixed sales and administration costs are estimated at DKK 600,000 of which DKK 150,000 are depreciations. In regards to liquidity (cash flow), management Pia makes the following observations: Liquidity at the beginning of December is DKK 1,250,000. On average 60% of the sale is collected within the month of sales and 40% in the next month. Regarding accounts payables, Iron and Steel pays their suppliers 30% within the purchase month and 70% is within next month. All other expenses are paid within the same month. In November, Iron and Steel generated a sales revenue of DKK 12,500,000 and purchased cubic meters of steel in value of DKK 11,240,000. Based on inventory controls, which show that there are 50,000 cubic meters of steel in the warehouse, the plant manager says that in order to fulfill December production plans and cover for the safety stock, Iron and Steel needs to purchase 70,000 cubic meters of steel at the beginning of the month. Question 1: Prepare a liquidity (cash flow) budget for December for Iron and Steel A/S. Question 2: Then prepare an operating budget for December for Iron and Steel A/S. (Please disregard other production costs such as direct wages and indirect production costs). Question 3: Prepare furthermore an inventory valuation at the beginning and end of December for Iron and Steel A/S. When December has passed, Pia Hansen looks back on the month to prepare a variance analysis. Actually, 85,000 meters steel fences have been sold, at an average price of DKK 139.00 per meter. In the production, Iron and Steel used in total 63,750 cubic meters of iron, at the total cost of 11,220,000 DKK. The fixed costs of the period, including depreciation, amounted to DKK 580,000. Question 4: Construct a static variance analysis. Pia Hansen is unsure about the variance analysis and feels that it is not detailed enough, and thereby not accurate. Therefore, she asks one of her employees, Sren Madsen, to take a closer look at this. Sren Madsen has learned that you are to separate volume and price in a variance analysis. Therefore, he will make a flexible budget. Question 5: Prepare a flexible budget. Question 6: Conduct a variance analysis and comment on the results. Your analysis should include: -your comments on the static budget variance -your comments on the efficiency and price variance for direct materials usage -your reflections upon the overall performance of the company Question 7: Discuss general pros and cons regarding using budgeting as a planning tool, strategic alignment tool and motivation tool