Question

Purpose Ltd manufactures and sells plastic storage containers through associated retail outlets throughout Australia. To compete more effectively it has recently introduced a budgetary control system to assist with planning and control of operations. Detailed below is the original static budget set at the start of the month, actual performance figures and the flexed budget for their most popular storage container sold for the month of December 2018,

BUDGET (static)                      ACTUAL                     FLEXED

Output (production and sales)    3000 Units                               4,500 Units                  4,500 Units

                                                $                                              $                                  $

Sales                                        $45,000                                    $65,250                        $67,500

                                                3000 @ $15                             4500 @ $14.50             4,500@ $15

Raw Materials                          ($18,000)                                 ($25,200)                     ($27,000)

36,000 units                             56000 units                  54,000 units     @50c p u                                    @45c p u                     @50c p u

Labor                                       ($6000)                                    ($8280)                        ($9,000)

                                                300 hours                                 460 hours                     450 hours

                                                @$20 ph                                  @18 ph                        @$20 ph

                                               

Fixed Overheads                      ($5,000)                                   ($6,900)                       ($5000)

Operating Profit                        $16,000                                    $24,870                        $26,500

REQUIRED:

                       

1. Describe the purpose and benefits of the flexed budget in identifying deviations from planned performance. (limit 80 words)

                                                                                                     

2. Based on information above , reconcile the operating profit under a static budget to the actual operating profit breaking down the reconciliation and identifying the following favorable and unfavorable variances:

• Sales Volume Variance
• Sales Price Variance
• Materials Usage Variance
• Materials Price Variance
• Labor Usage Variance
• Labor Rate Variance
• Fixed Overhead Spend Variance

Show full workings as to how you calculated each of the above variances

3. Assuming that the budgets above were all accurately set in terms of labor times and rates and material usage and price, suggest one feasible cause for each variance you have identified in (b) from what you know about the company and appreciating the business has produced and sold 50 percent more than initially anticipated under the static budget. As part of your answer focus on explaining why a favorable variance in one area might explain an unfavorable variance in another area – interrelationships and the possible tradeoff between variances in attempting to meet budgeted targets.(140 word limit)   

Answer 1

a) A Flexible budget is a budget which compares the the actual results with same volume of output at standard rates. It gives meaningful comparison of actual results with budget and helps management in taking right remedial actions. Static budget does not consider changes in business conditions and hence is not flexible. But flexible budget is much needed for management in today's world to succeed

b)

c)