M plc designs, manufactures and assembles furniture. The furniture is for home use and therefore varies considerably in
Posted: Mon Apr 25, 2022 7:28 am
M plc designs, manufactures and assembles furniture. The
furniture is for home use and therefore varies considerably in
size, complexity and value. One of the departments in the company
is the Assembly Department. This department is labour intensive;
the workers travel to various locations to assemble and fit the
furniture using the packs of finished timbers that have been sent
to them.
Budgets are set centrally and they are then given to the
managers of the various departments who then have the
responsibility of achieving their respective targets. Actual costs
are compared against the budgets and the managers are then asked to
comment on the budgetary control statement. The statement for April
for the Assembly Department is shown below.
Budget
Actual
Variance
Assembly labour
hours
6,400
7,140
$
$
$
Assembly
labour
51,970
58,227
6,257 Adverse
Furniture
packs
224,000
205,000
19,000 Favourable
Other
materials
23,040
24,100
1,060 Adverse
Overheads
62,060
112,340
50,280 Adverse
Total
361,070
399,667 38,597
Adverse
Note: the costs shown are for assembling and fitting
the furniture (they do not include time spent travelling to jobs
and the related costs). The hours worked by the Manager are not
included in the figure given for the assembly labour hours.
The Manager of the Assembly Department is new to the job and has
very little previous experience of working with budgets but he does
have many years’ experience as a supervisor in assembly
departments. Based on that experience he was sure that the
department had performed well. He has asked for your help in
replying to a memo he has just received asking him to “explain the
serious overspending in his department”. He has sent you some
additional information about the budget:
1. The budgeted and actual assembly labour costs include the
fixed salary of $2,050 for the
Manager of the Assembly Department. All of the other labour is
paid for the hours they work.
2. The cost of furniture packs and other materials is assumed by
the central finance office of
M plc to vary in proportion to the number of assembly labour
hours worked.
3. The budgeted overhead costs are made up of three elements: a
fixed cost of $9,000 for services from central headquarters, a
stepped fixed cost which changes when the assembly hours exceed
7,000 hours, and some variable overheads. The variable overheads
are assumed to vary in proportion to the number of assembly labour
hours. Working papers for the budget showed the impact on the
overhead costs of differing amounts of assembly labour hours:
Assembly labour
hours
5,000
7,500
10,000
Overhead
costs
$54,500
$76,500
$90,000
The actual fixed costs for April were as budgeted.
Required:
(a) Prepare, using the additional information that the
Manager of the Assembly Department has given you, a budgetary
control statement that would be more helpful to
him.
(7 marks)
(b)
(i) Discuss the differences between the format of the
statement that you have produced and that supplied by M
plc.
(4 marks)
(ii) Discuss the assumption made by the central office of M plc
that costs vary in proportion to assembly labour
hours.
(3 marks)
(c) Discuss whether M plc should change to a system of
participative
budgeting.
(6 marks)
furniture is for home use and therefore varies considerably in
size, complexity and value. One of the departments in the company
is the Assembly Department. This department is labour intensive;
the workers travel to various locations to assemble and fit the
furniture using the packs of finished timbers that have been sent
to them.
Budgets are set centrally and they are then given to the
managers of the various departments who then have the
responsibility of achieving their respective targets. Actual costs
are compared against the budgets and the managers are then asked to
comment on the budgetary control statement. The statement for April
for the Assembly Department is shown below.
Budget
Actual
Variance
Assembly labour
hours
6,400
7,140
$
$
$
Assembly
labour
51,970
58,227
6,257 Adverse
Furniture
packs
224,000
205,000
19,000 Favourable
Other
materials
23,040
24,100
1,060 Adverse
Overheads
62,060
112,340
50,280 Adverse
Total
361,070
399,667 38,597
Adverse
Note: the costs shown are for assembling and fitting
the furniture (they do not include time spent travelling to jobs
and the related costs). The hours worked by the Manager are not
included in the figure given for the assembly labour hours.
The Manager of the Assembly Department is new to the job and has
very little previous experience of working with budgets but he does
have many years’ experience as a supervisor in assembly
departments. Based on that experience he was sure that the
department had performed well. He has asked for your help in
replying to a memo he has just received asking him to “explain the
serious overspending in his department”. He has sent you some
additional information about the budget:
1. The budgeted and actual assembly labour costs include the
fixed salary of $2,050 for the
Manager of the Assembly Department. All of the other labour is
paid for the hours they work.
2. The cost of furniture packs and other materials is assumed by
the central finance office of
M plc to vary in proportion to the number of assembly labour
hours worked.
3. The budgeted overhead costs are made up of three elements: a
fixed cost of $9,000 for services from central headquarters, a
stepped fixed cost which changes when the assembly hours exceed
7,000 hours, and some variable overheads. The variable overheads
are assumed to vary in proportion to the number of assembly labour
hours. Working papers for the budget showed the impact on the
overhead costs of differing amounts of assembly labour hours:
Assembly labour
hours
5,000
7,500
10,000
Overhead
costs
$54,500
$76,500
$90,000
The actual fixed costs for April were as budgeted.
Required:
(a) Prepare, using the additional information that the
Manager of the Assembly Department has given you, a budgetary
control statement that would be more helpful to
him.
(7 marks)
(b)
(i) Discuss the differences between the format of the
statement that you have produced and that supplied by M
plc.
(4 marks)
(ii) Discuss the assumption made by the central office of M plc
that costs vary in proportion to assembly labour
hours.
(3 marks)
(c) Discuss whether M plc should change to a system of
participative
budgeting.
(6 marks)