- 20 Marks
PM – May 2024 – L2 – SB – Q3 – Budgeting and Budgetary Control
Evaluation of budgeting systems and identification of behavioral issues with variance reporting in a recently acquired company.
Question
Ogbunigwe Nigeria Limited is a big and reputable publishing firm established in the early 1970’s. The company has recently been taken over by Wisdom International Publishing Company (WIPC) – a multinational company operating in several countries of the world.
Mr. Pampam, who is the Managing Director of WIPC, has been sent from the company’s headquarters to review, among other things, the budgeting and reporting system used by Ogbunigwe Nigeria Limited.
During his visit to all the departments, he discovered that monthly budgets are prepared for each department in the company. Upon request, the newly acquired company submitted the last budget statement for the notebook production department, which covered Quarter 3 of 2022, as shown below:
Budget statement for Quarter 3
Department: Notebook Production
| Particulars | Actual Results (N’000) | Budget (N’000) | Variances (N’000) |
|---|---|---|---|
| Direct materials | 1,512 | 1,440 | (72) |
| Direct labor | 738 | 720 | (18) |
| Variable production overhead | 474 | 432 | (42) |
| Fixed production overhead | 354 | 336 | (18) |
| Variable administrative overhead | 246 | 240 | (6) |
| Fixed administrative overhead | 300 | 288 | (12) |
| Total costs | 3,624 | 3,456 | (168) |
| Sales value of production | 4,650 | 4,464 | 186 |
| Profit | 1,026 | 1,008 | 18 |
The Head of Department of the notebook production department, Mr. Josiah Okoli, commented on the state of affairs of the department. He revealed that the budget statement presented was based on 72,000 units with a standard labor processing time of 2.85 hours per unit.
Mr. Pampam observed that Mr. Josiah Okoli was not enthusiastic about the budget system. He viewed it as a pressure system imposed by the company to portray some departmental managers in a bad light. He pointed out that the system was hurriedly introduced by Dynamic Financial Konsult about twelve months ago. The consultant did not provide sufficient explanation to assist users of the budget to understand the system. Mr. Josiah Okoli expressed doubt about the competence of the consultant and believed the system was not suitable for Ogbunigwe Nigeria Limited. He even stated that his department might have actually made a loss, as against the reported profit.
This situation cuts across many departments, making it imperative and urgent to resolve the issues with the budget system. Your advice to Mr. Pampam will assist tremendously in addressing these problems.
Required:
a. Redraft the budget statement in a more informative manner, showing the relevant variances. (12 Marks)
b. State the general behavioral problems associated with budgeting, and relate these issues to this situation. (4 Marks)
c. Recommend ways to make the budgeting system more useful and acceptable in the current situation. (4 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: Budgeting, Management Control, Profitability, Variance Analysis
- Level: Level 2
- Topic: Budgeting and Budgetary Control
- Series: MAY 2024