QUESTION a) Individual managers are held responsible for investigating differences between budgeted and actual results,

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QUESTION
a) Individual managers are held
responsible for investigating differences between budgeted and
actual results, and are then expected to take corrective action or
amend the plan in the light of actual events. The wrong approach to
budgetary control is to compare actual results against a fixed
budget. Consider the following example. Tree manufactures a single
product, the bough. Budgeted results and actual results for June
for the bough are shown below.
Production and sales (Units)
Budget for 1000 units (RM)
Actual results for 2000 units (RM)
Variance (RM)
Sales revenue
37000
80000
43000
Direct materials
5000
6500
-1500
Direct labor
3000
4500
-1500
Maintenance
3600
4000
-400
Depreciation
4000
1000
3000
Rent and rates
1500
1600
-100
Other costs
3600
5000
-1400
Total costs
20700
22600
-1900
Profit
16300
57400
-41100
In this example, the variances
are meaningless for purposes of control. Costs were higher than
budget because the volume of output was also higher (budgeted unit
is 2000 units whereas actual is 3000 units); variable costs would
be expected to increase above the budgeted costs. There is no
information to show whether control action is needed for any aspect
of costs or revenue.
You are required to produce a flexible
budget using marginal costing techniques based on the following
information regarding cost behavior:
b) At the most minimal level, a budget
contains an estimated income statement for future periods. A more
complex budget contains a sales forecast, the cost of goods sold
and expenditures needed to support the projected sales, estimates
of working capital requirements, fixed asset purchases, a cash flow
forecast, and an estimate of financing needs. This should be
constructed in a top-down format, so a master budget contains a
summary of the entire budget document, while separate documents
containing supporting budgets roll up into the master budget and
provide additional detail to users.
Required:
Discuss the budget preparation process
in an organization.