- 20 Marks
Question
Ogbunigwe Nigeria Limited is a big and reputable publishing firm established in the early 1970s. 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 note book production which covered Quarter 3 of 2022 as shown below:
The budget statement presented was as shown below: Budget statement for Quarter 3 Department: Note Book Production:
Particulars Actual results: Labour hours:
Units produced 75,000 212,100
| ACTUAL RESULTS | BUDGET | VARIANCES | |
|---|---|---|---|
| N’000 | N’000 | N’000 | |
| Direct materials | 1,512 | 1,440 | (72) |
| Direct Labour | 738 | 720 | (18) |
| Variable production overhead | 474 | 432 | (42) |
| Fixed production overhead | 354 | 336 | (18) |
| Variable admin. Overhead | 246 | 240 | (6) |
| Fixed admin 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 Note book Production department – Mr. Josiah Okoli-in his comment on the state of affairs of the department, revealed that the budget statement presented was based on 72,000 units with a standard labour processing time of 2.85 hours per unit.
Mr. Pampam observed that Mr. Josaih Okoli was not in any way enthusiastic about the budget system. He saw it as a pressure system imposed by the company to permit some Departmental Managers in bad light. He pointed out that the system was hurriedly introduced by Dynamic Financial Konsult about twelve months ago. The consultant did not take time to provide explanation that could assist users of the budget to understand the budgeting system. The Head of Department of Note book Production department who was very experienced doubt the competence of the consultant. He was of the opinion that the system introduced in Ogbunigwe Nigeria Limited was either a ready-made one developed for another company and not suitable for the company or that the consultant did not understand the system well enough to give him the needed confidence to educate the users. He concluded by stating that he was sure his department made a loss as against the positive figure recorded in the report and there was the possibility of reporting a loss at another period when profit was actually made. The situation reported above cuts across virtually all the departments and so the need to nip the issue in the bud became very imperative and urgent.
The task of making budgeting system more useful and acceptable in a biased environment like this, no doubt, seems difficult but your advice to Mr. Pampam will assist tremendously in getting the company out of the quagmire resulting from various contraception of this budget system.
You are required to:
a. Redraft the budget statement in a more informative manner, showing the relevant variances.
(12 Marks)
b. State the general behavioural problems associated with budgeting and in particular, relate such issues with this situation. (4 Marks)
c. State the steps that Mr. Pampam should take in order to revitalise the budget system. (4 Marks)
Answer
a. Redraft budget using flexible budgeting concept
| S/N | Particulars | Original Budget | Flexible Budget | Actuals | Variances |
|---|---|---|---|---|---|
| 72,000 units | 75,000 units | 75,000 units | |||
| 1 | Sales | 4464 | 4650 | 4650 | – |
| Less | |||||
| Direct material | 1440 | 1500 | 1512 | (12) | |
| Direct labour | 720 | 750 | 738 | 12 | |
| Variable overhead: | |||||
| Production | 432 | 450 | 474 | (24) | |
| Administration | 240 | 250 | 246 | 4 | |
| Total variable cost | 2832 | 2950 | 2970 | (20) | |
| Contribution | 1632 | 1700 | 1680 | (20) | |
| Less | |||||
| Fixed cost: | |||||
| Production | 336 | 336 | 354 | (18) | |
| Administration | 288 | 288 | 300 | (12) | |
| 624 | 624 | 654 | (30) | ||
| Net Profit | 1008 | 1076 | 1026 | (50) |
Note: Variances in bracket are adverse.
Computation of relevant variances:
Sales related variances (Sales department):
Sales Price variance = (ASP – SSP)AQ=(₦62 – ₦62 )75,000 = nil
Sales Quantity variance = (BQ – AQ) SSP = (75000 – 75,000) ₦62 = nil.
Direct material Variances (Purchases department):
Material Price variances= AQ (AC – SC) = 75,000(₦20.16-N20.00)= ₦12,000 A
Material Usage variance = (AQ – SQ) ₦20 = ₦20.00 (75,000 – ₦75,000)=Nil
Direct Labour Variances (Personnel departments):
Direct Labour rate variance = (AR – SR)x AH = (₦3.47949 – ₦3.50877) 212,100= ₦6210.29 F
Direct labour efficiency variance = (AH – SH )SR = (212100 – 213750) ₦3.50877 =₦5789.71F
Labour cost variance = ₦6210.29F + ₦5789.71F = ₦12,000F
Variance production overhead variance (Production department)
Expenditure variance = AH (AR – SR ) = 212,100 {(₦474,000/212100) – (₦450,000/213750)} = 212100 (₦2.23479 – ₦2.10526) = ₦27,473.31A
Efficiency variance = SR ( AH – SH) = ₦2.10526 (212100 – 213750) = ₦3,473.31F
Variable Production Overhead variance = N24,000 A
Other variances:
| S/N | Particulars | Actual Costs | Flexed costs | Variances |
|---|---|---|---|---|
| 1 | Variable Administration costs | ₦246,000 | ₦250,000 | ₦4000F |
| 2 | Fixed Production Costs | ₦354,000 | ₦336,000 | ₦18,000A |
| 3 | Fixed Administration costs | ₦300,000 | ₦288,000 | ₦12,000A |
b. State the general behavioural problems associated with budgeting and in particular relate such issues with this situation. Such problems include:
Use of past record to estimate is not realistic;
Budget may contain slacks/dummies leading to over-bloated budget estimates;
Budget may be realistic or unrealistic due to source of data and information;
They may originate from incorrect or inaccurate records/data;
It could be seen as a pressure device especially if prepared with sentimental Attachments;
Personnel resistance, especially, if the budget preparation is top down driven;
Lack of participation may introduce lack of acceptance to the budget;
Sub optimisation where departments work for their individual goals not for Company goal;
Budget slack or budget bias; and
Fundamental misunderstanding about cost cutting especially where management see budget control as cost cutting.
c. Ways of addressing the negativities of behavioural issues in budgeting
Introduce a realistic budgeting approach such as zero Based Budgetting approach.
Introduce incentive schemes like bonuses.
Train and develop management and staff members in the application of budget and budgeting control system and Total Quality Management Techniques.
Amend the reward system.
Set up fair unit to resolve disputes emanating from petitions, disputes, resentment and resistances.
Ensure a change in management culture.
Put in place a participative/negotiated approach to budgeting
- Uploader: Samuel Duah