Question

You work as a Management Accountant for the Victoria Plumbing branch based in Winchester. The company is a specialist in the installation of luxury Bathrooms and Kitchens. Their Bathrooms and Kitchens are highly sophisticated pre-designed or customised according to customer order. The local office is made of three departments Bathrooms and Kitchens being profit centres and General Administration (GA) being a cost centre. The GA is a fixed cost and consists of design, finance and administration

You have been provided the following budgeted information for the period ending December 2019.

	Bathrooms	Kitchens
Number of orders	2,000	4,000
Price per order Direct costs per order GA charge per order	£ 7,000 3,000 2,500	£ 10,000 5,500 2,500
Budgeted profit per order	1,500	2,000

Below is the actual information for the period ending December 2019

	Bathrooms	Kitchens
Number of orders	2,500	2,600
Price per order Direct costs per order GA charge per order	£ 6,100 2,700 2,500	£ 13,000 8,000 2,500
Actual profit per order	900	2,500

The actual cost of GA is estimated to be £17.5million.

Required:

1. Calculate the budgeted and actual profits for the Bathrooms and Kitchen departments and for the whole branch.

b)Calculate the Sales Price Variances, Sales Mix Profit and Sales Profit Quantity Variances.   c)Prepare a reconciliation for the actual and budgeted profits for the branch that shows the variances as much as possible.

                                                                                 

Answer 1

a)

Budgeted profit

Particulars	Bathrooms	Kitchens	Branch
Revenue (Number of orders* Price per order)	2000* £7000= £14000000	4000*£10000= £40000000	£54000000
Less: Direct cost per order (Number of orders*Cost per order)	2000*£3000= (£6000000)	4000*£5500= (£22000000)	(£28000000)
GA charged (Number of orders*GA charged per order)	2000*£2500= (£5000000)	4000*£2500= (£10000000)	(£15000000)
Budgeted profit	£3000000	£8000000	£11000000

Actual profit

Particulars	Bathrooms	Kitchens	Branch
Revenue (Number of orders* Price per order)	2500*£6100= £15250000	2600*£13000= £33800000	£49050000
Less: Direct cost per order (Number of orders*Cost per order)	2500*£2700= £6750000	2600*£8000= £20800000	(£27550000)
GA charged (Number of orders*GA charged per order)	2500*£2500= £6250000	2600*£2500= £6500000	(£12750000)
Actual profit	£2250000	£6500000	£8750000

b)

Bathrooms

Budgeted quantity= 2000 orders

Actual quantity= 2500 orders

Budgeted price used for calculation= Budgeted selling price – Budgeted variable cost= £7000-£3000= £4000

Actual price used for calculation = Actual selling price – Budgeted variable costs

= £6100 -£3000= £3100

Kitchens

Budgeted quantity= 4000 orders

Actual quantity= 2600 orders

Budgeted price used for calculation= Budgeted selling price – Budgeted variable cost= 10000-5500= £4500

Actual price used for calculation = Actual selling price – Budgeted variable costs

= 13000-5500= £7500

Revised standard quantity

= Actual orders*(Budgeted orders per department/ Total budgeted orders)

Actual orders= 2500+2600= 5100 orders

Budgeted orders= 2000+4000= 6000 orders

Revised standard quantity of Bathrooms= 5100*(2000/6000) = 1700

Revised standard quantity of kitchens= 5100*(4000/6000) = 3400

Sales price variance

= (Actual price – Budgeted price) * Actual quantity;

Bathroom= (3100-4000) *2500= £2250000 Unfavorable.

(Since the sales price is less than the budgeted, so variance is unfavorable)

Kitchen= (7500-4500)* 2600= £7800000 Favorable.

(Since the sales price is greater than the budgeted, so variance is favorable)

Total Sales price variance = £2250000 Unfavorable + £7800000 Favorable

= £5550000

Sales mix variance

= (Actual quantity – Revised standard quantity) * Budgeted price

Bathroom= (2500-1700) * 4000= £ 3200000 Favorable

(Actual quantity is higher so variance is favorable)

Kitchen = (2600-3400) *4500= £3600000 Unfavorable

(Revised quantity is higher so variance is unfavorable)

Total sales mix variance = £ 3200000 Favorable + £3600000 Unfavorable

= £400000 Unfavorable

Sales quantity variances

= (Revised standard quantity – Budgeted quantity) * Budgeted price

Bathrooms= (1700-2000) *4000= £1200000 Unfavorable (Actual sales volume at budgeted mix, that is revised standard quantity is lower so variance is unfavorable.)

Kitchens= (3400-4000) *4500= £2700000 Unfavorable. (Actual sales volume at budgeted mix, that is revised standard quantity is lower so variance is unfavorable.)

Total Sales quantity variance= £1200000 Unfavorable+ £2700000 Unfavorable

= £3900000 Unfavorable

c)

Reconciliation for the actual and budgeted profits for the branch

Budgeted profit                                                                            £11000000

Less: Decrease in revenue (£54000000 -£49050000)               (£4950000)

Add: Increase in direct costs (28000000-27550000)                  £450000

Add: Decrease in GA charged (15000000 -12750000)               £2250000

Actual profit                                                                               £8750000