Neptune Ltd produces and sells pizzas to supermarkets. Neptune has three main type of pizza: the Old Favourite (OF), the Young 'Un (YU) and the New Healthy (NH). The NH pizza is a new type of pizza for Neptune, based on 100% organic ingredients and packaged in a way which causes minimal damage to the environment. Demand for the NH has been unpredictable which has caused Neptune to adopt a rolling budget approach for forecasting purposes. The OF pizza operates in a very stable market. Sales growth is unlikely, the price of raw material is very stable and budgeted sales and profit targets are usually very accurate predictors of actual sales and profit targets. The OF pizza has used an incremental budgeting approach for several years. The YU pizza operates in a market where popularity can fluctuate and it can be very popular or unpopular depending mainly upon the tastes of children between ages 5 to 15, to whom it is targeted. The YU pizza has used an incremental budgeting approach for several years also. The actual figures for quarter 1 for the NH pizza are as follows: ACTUAL Q1 Revenue Cost of sales Gross profit Distribution costs Administration costs Operating profit $000 3,200 (2.300) 900 (300) I (250) 1 350 103 The budget agreed at the start of the year was: Q1 1 Q2 04 $000 $000 $000 $000 Revenue 3,150 3.450 3 .670 3,800 Cost of sales (2,000) (2,200) (2,350) (2,500) Gross profit 1,150 1,250 | 1,320 1,300 Distribution (280) (280) (285) (285) costs Administration (220) (220) (230) (230) costs Operating 650 750 805785 profit TOTAL $000 14.070 (9,050) 5,020 (1,130) (900) 2,990 Notes: 1. It is now expected that there will be sales volume growth of 3% in each of the quarters 2, 3 and 4 and in quarter 1 of the following budget year. (Note: Calculations for future quarters are based on Q1 actual sales). 2. Gross profit margin is now expected to be 28% until quarter 1 of the next budget year when it is expected to be 30%. 3. Distribution costs are expected to rise by 3% every quarter given increased fuel costs. (Note: Calculations for future quarters are based on Q1 costs). 4. Administration costs are expected to reduce by 5% in each of quarters 2 and 3 but increase by 10% in quarter 4 and remain constant thereafter. This is due to changes in Head Office costs. (Note: Calculations for future quarters are based on Q1 costs). Required: a) Prepare the new rolling budget for quarters 2, 3, 4 and quarter 1 of the next budget year for the New Healthy pizza. (12 marks) b) Briefly comment on the profit figures produced by the rolling budget approach compared to the start of year budget figures. (4 marks) c) Assess the suitability of an incremental budgeting approach for both the Old Favourite and the Young 'Un pizza. (6 marks) d) Explain what is meant by dysfunctional management behaviour and discuss its relevance in budgeting (8 marks)
