Question

To encourage its foreign managers to incorporate expected exchange rates into their operating decisions, Sam Distributors requires that all foreign currency budgets be set in Australian dollars (AU$) using exchange rates projected for the end of the budget year. To further motivate its local managers to react to unexpected exchange rate changes, operating results at year end are translated to Australian dollars at the actual spot rate at the end of the year. Deviations between actual and budgeted exchange rates are discarded in judging the manager's performance.

At the start of the 2019 fiscal year, budgeted results for the Tongan affiliate were as follows (amounts in thousands):

Sales                           TOP 12 000 000                     AU$3 840   

Expenses                     TOP 9 600 000                       AU$3 072

Net income                 TOP 2 400 000                       AU$768

Actual results for the 2019 year in Australian dollars were as follows:

Sales                           AU$3 240 000   

Expenses                     AU$2 520 000                      

Net income                 AU$720 000             

Relevant exchange rates for the Tongan Paʻanga (TOP) during the year were as follows:

January 1, 2019 spot rate:                              AU$0.35   

Sam Distributors' one-year forecast               AU$0.30

December 31, 2019 spot rate                          AU$0.25

Required:

Based on the above information, how did the Tongan manager perform? Justify your answer (show all the workings).

Answer 1

First we will have to convert all the values to TOP so deviation between actual and budgeted exchange rates are discarded.

To compare both the budgets we will compare budgeted results in TOP given in start 2019 and actual as on year end 2019 given in AUD and convert to TOP by spot rate of December 31, 2019.

	Budgeted	Actual
Particulars	TOP	AUD	TOP
Sales	12,000,000	3,240,000	12,960,000
Expenses	9,600,000	2,520,000	10,080,000
Net Income	2,400,000	720,000	2,880,000

As we can see, managers have clearly outperformed the budgeted perfromance by 20%.