MA – L2 – Q14 – Budgetary control

A company operating out of Mampong provides three types of delivery service to customers: service A, service B, and service C. Customers are a mix of firms with a contract for service with the company, and non-contract customers.
The following information relates to performance in the year to 31st December Year 1:

Service A Service B Service C
Number of deliveries made 350,000 250,000 20,000
% of deliveries to contract customers 60% 60% 80%
Price charged per delivery:
Contract customers GH¢9 GH¢15 GH¢300
Premium for non-contract customers +30% +50% +20%

The premium for non-contract customers is in addition to the rate charged to contract customers.
All employees in the company were paid GH¢45,000 per year and sundry operating costs, excluding salaries and fuel costs, were GH¢4,000,000 for the year.
The following operational data for the year relates to deliveries:

Services A and B Service C
Average kilometres per vehicle/day 400 600
Number of vehicles 50 18
Operating days in the year 300 300

For Year 2, the company has agreed a fixed price contract for fuel. As a result of this contract, fuel prices will be:
(a) GH¢0.40 per kilometre for Services A and B
(b) GH¢0.80 per kilometre for Service C.
Sales prices will be 3% higher in Year 2 than in Year 1, and salaries and operational expenses will be 5% higher. Sales volume will be exactly the same as in Year 1.
The number of employees will also be the same as in Year 1: 60 employees working full-time on Services A and B and 25 employees working full-time on Service C.
Required:
(a) Prepare a budgeted statement of profit or loss for the year to 31st December Year 2.

(b) Comment on vehicle utilisation.

Budgeted statement of profit or loss for the year to 31 December Year 2

Service A Service B Service C Total
Revenue:
Contract customers GH¢1,946,700 GH¢2,317,500 GH¢4,944,000 GH¢9,208,200
Non-contract customers GH¢1,687,140 GH¢2,317,500 GH¢1,483,200 GH¢5,487,840
Total revenue GH¢3,633,840 GH¢4,635,000 GH¢6,427,200 GH¢14,696,040
Costs:
Salaries GH¢4,016,250
Fuel:
Services A and B GH¢2,400,000
Service C GH¢2,592,000
Sundry operational costs GH¢4,200,000
Total costs GH¢13,208,250
Net profit GH¢1,487,790

Workings
Revenue:
Service A: contract customers – 350,000 × 60% × GH¢9 × 1.03 = GH¢1,946,700
Service A: non-contract customers – 350,000 × 40% × GH¢9 × 1.30 × 1.03 = GH¢1,687,140
Service B: contract customers – 250,000 × 60% × GH¢15 × 1.03 = GH¢2,317,500
Service B: non-contract customers – 250,000 × 40% × GH¢15 × 1.50 × 1.03 = GH¢2,317,500
Service C: contract customers – 20,000 × 80% × GH¢300 × 1.03 = GH¢4,944,000
Service C: non-contract customers – 20,000 × 20% × GH¢300 × 1.20 × 1.03 = GH¢1,483,200

Salaries: GH¢45,000 × 85 employees × 1.05 = GH¢4,016,250
Sundry operational costs: GH¢4,000,000 × 1.05 = GH¢4,200,000
Fuel:
Services A and B – 400 km × 50 vehicles × 300 days × GH¢0.40 = GH¢2,400,000
Service C – 600 km × 18 vehicles × 300 days × GH¢0.80 = GH¢2,592,000

There is no information about weight carried, only about distance travelled. All vehicles were used for 300 days in the year. Presumably, vehicles might be used for 365 days per year, indicating an overall utilisation ratio for all vehicles of 82.2%.
Other utilisation measure: a revenue measure might be used as an indication of the utilisation of vehicles.

Services A and B Service C
Revenue per vehicle (GH¢8,268,840 / 50) = GH¢165,377 (GH¢6,427,200 / 18) = GH¢357,067

Kilometres travelled each year might also be a measure of utilisation:
Service A and B vehicles travel on average (400 × 300) = 120,000 kilometres each year.
Service C vehicles travel on average (600 × 300) = 180,000 kilometres each year.