Question 1

XY Limited is preparing its annual budgets for the year to 31st December 2021. It manufactures and sells one product, which has a selling price of £400.00. The marketing director believes that the price can be increased to £410.00 with effect from 1st July 2021 and that at this price the sales volume for each quarter of 2021 will be as follows:

Sales Volume

Quarter 1 22 000

Quarter 2 25 000

Quarter 3 15 000

Quarter 4 27 500

Sales for each quarter of 2022 are expected to be 40 000 units.

Each unit of the finished product which is manufactured requires four units of component R and three units of component T. Both items are purchased from an outside supplier. Currently prices are

Component R £6.00 each

Component T £2.00 each

The components are expected to maintain their current levels of pricing as above during all quarter periods of 2021.

Assembly of the two components into the finished product requires 6 labour hours:

labour is currently paid £5.50 per hour. A 4% increase in wage costs is anticipated to take effect from 1st October 2021.

Variable overhead costs are expected to be £10 per unit for the whole of 2021, fixed production overhead costs are excluded from the budget.

Stocks on 31st December 2020 are expected to be as follows:

Finished units 6 000 units

Closing stocks at the end of each quarter are to be as follows:

Finished units 10% of next quarter’s sales

Required:

a) Prepare the following budgets of XY Limited for the year ending 31st December 2021, showing values for each quarter and the year in total:

i) sales budget (in £s and units)

ii) production budget (in units)

iii) material usage budget (in units)

iv) production cost budget (in £s)

b) Explain the meaning and critically evaluate the use of continuous or rolling budgets.

Critically evaluate the financial and non-financial (qualitative) issues that may arise when an organisation is considering the following decision making situations:

a) Product mix decisions when capacity constraints exist (limiting factors).

b) Outsourcing (make or buy) decisions

a) Critically discuss the many different purposes of a standard costing system

b) Critically evaluate whether or not Standard Costing procedures can be equally applied to both service industries and manufacturing companies

c) The following outcomes were noted for company A using a standard costing and variance analysis system.

Material price variance –favourable

Material usage variance –adverse

Wage rate variance -favourable

Labour efficiency variance-adverse

Identify and critically evaluate the possible causes of the variances noted above for  company A.