【Questions】
3 Spike Co manufactures and sells good quality leather bound diaries. Each year it budgets for its profits, including
detailed budgets for sales, materials and labour. If appropriate, the departmental managers are allowed to revise their
budgets for planning errors.
In recent months, the managing director has become concerned about the frequency of budget revisions. At a recent
board meeting he said ‘There seems little point budgeting any more. Every time we have a problem the budgets are
revised to leave me looking at a favourable operational variance report and at the same time a lot less profit than
promised.’
Required:
(a) Describe the circumstances when a budget revision should be allowed and when it should be refused.
(5 marks)
Two specific situations have recently arisen, for which budget revisions were sought:
Materials
A local material supplier was forced into liquidation. Spike Co’s buyer managed to find another supplier, 150 miles
away at short notice. This second supplier charged more for the material and a supplementary delivery charge on top.
The buyer agreed to both the price and the delivery charge without negotiation. ‘I had no choice’, the buyer said, ‘the
production manager was pushing me very hard to find any solution possible!’ Two months later, another, more
competitive, local supplier was found.
A budget revision is being sought for the two months where higher prices had to be paid.
Labour
During the early part of the year, problems had been experienced with the quality of work being produced by the
support staff in the labour force. The departmental manager had complained in his board report that his team were
‘unreliable, inflexible and just not up to the job’.
It was therefore decided, after discussion of the board report, that something had to be done. The company changed
its policy so as to recruit only top graduates from good quality universities. This has had the effect of pushing up the
costs involved but increasing productivity in relation to that element of the labour force.
The support staff departmental manager has requested a budget revision to cover the extra costs involved following
the change of policy.
Required:
(b) Discuss each request for a budget revision, putting what you see as both sides of the argument and reach a
conclusion as to whether a budget revision should be allowed. (8 marks)
The market for leather bound diaries has been shrinking as the electronic versions become more widely available and
easier to use. Spike Co has produced the following data relating to leather bound diary sales for the year to date:
Budget
Sales volume 180,000 units
Sales price $17·00 per unit
Standard contribution $7·00 per unit
The total market for diaries in this period was estimated in the budget to be 1·8m units. In fact, the actual total market
shrank to 1·6m units for the period under review.
Actual results for the same period
Sales volume 176,000 units
Sales price $16·40 per unit
Required:
(c) Calculate the total sales price and total sales volume variance. (4 marks)
(d) Analyse the total sales volume variance into components for market size and market share. (4 marks)
(e) Comment on the sales performance of the business.
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