Question

Assume that The AM Bakery is preparing a budget for the month ending November 30. Management prepares the budget by starting with the actual results for August that is shown below. Then, management considers what the differences in costs will be between August and November.

THE AM BAKERY
Bakery sales
Actual and Budgeted Costs
For the Month Ending August 31
	Actual
Ingredients
Flour	$	3,980
Butter		3,580
Oil		1,940
Fruit		1,540
Nuts		980
Chocolate		1,200
Other		800
Total ingredients	$	14,020
Labor
Channel manager	$	5,500
Other		10,900
Utilities		2,800
Rent		4,000
Marketing		200
Total bakery costs	$	37,420
Revenues		53,200

Management expects revenue in November to be 30 percent higher than in August, and it expects all ingredient costs (e.g., flour, butter, and so on) to be 25 percent higher in November than in August. Management expects “other” labor costs to be 30 percent higher in November than in August, partly because more labor will be required in November and partly because employees will get a pay raise. The manager will get a pay raise that will increase his salary from $5,500 in August to $6,000 in November. Rent, utilities, and marketing costs are not expected to change.

Now, fast forward to early December and assume the following actual results occurred in November:

Required:

a. Prepare a statement that compares the budgeted and actual costs for November. (Negative amounts should be indicated by a minus sign.)

b. Suppose that you have limited time to determine why actual costs are not the same as budgeted costs. Which three cost items would you investigate to see why actual and budgeted costs are different?

• Butter, other labor and oil

• Nuts, flour, and utilities

• Flour, nuts, and butter

Answer 1

Please see the workings.

A. From the workings it is clear that the change expected by management is positive and according to the chane profit will increase to a extent of $8685.

B. We wil analyse butter, other labour and oil, because we know that the change we expected in Nove is in ingredients, Labour and revenue, only in this three main areas only.