R plc is an engineering company that repairs machinery and manufactures replacement parts for machinery used in the buil

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R plc is an engineering company that repairs machinery and
manufactures replacement parts for machinery used in the building
industry. There are a number of different departments in the
company including a foundry, a grinding department, a milling
department and a general machining department. R plc prepared
its budget for the year ending 31 December 2003 using an
incremental budgeting system. The budget is set centrally and is
then communicated to each of the managers who have responsibility
for achieving their respective targets. The following report
has been produced for the general machining department for October
2003:
Budget
Actual
Variance
Number of machine
hours
9,000
11,320 2,320 (F)
$
$
$
Cleaning
materials
1,350
1,740
390 (A)
Steel
45,000
56,000 11,000 (A)
Other direct
materials
450
700 250
(A)
Direct
labour
29,000
32,400 3,400 (A)
Production
overheads
30,000
42,600 12,600 (A)
_______
_______
______
Total
105,800
133,440 27,640 (A)
_______
_______
______
The Manager of the general machining department has received a
memo from the Financial Controller requiring him to explain the
serious overspending within his department.
The manager has sought your help and, after some discussion, you
have ascertained the following:
Activity (machine
hours)
3,000
7,000
14,000
Costs
($)
13,500
24,500
45,800
Required:
(a) Prepare a revised
budgetary control statement using the additional information that
you have obtained from the Manager of the general machining
department.
(b)
(i) Explain the
differences between an incremental budgeting system and a zero
based budgeting system.
(ii) Explain why R plc
and similar organisations would find it difficult to introduce a
system of zero based budgeting.
(c) Explain the benefits
of involving the managers of R plc in the budget setting process,
rather than setting the budget centrally as is R plc’s current
policy.