- 20 Marks
MA – L2 – Q30 – Budgetary control
Redraft budget statement for APP Limited, identify behavioural issues, and suggest steps to improve budgeting system.
Question
APP LIMITED
APP Limited is a well-established book publishing company founded in the early 1950s, following the success of books published by Adio. The company has recently been acquired by Contemporary Publishing Group (CPG) – a multinational company operating across all continents.
Mr. Goodluck of CPG International has been sent from the company’s headquarters to review, among other things, the budgeting and reporting system used by APP.
During his visit to all departments, he discovered that monthly budgets are prepared for each department in the company. Upon request, the last budget statement for the Advanced Education Notebook Production Department (AENP) for period III was presented to him.
The budget statement presented was as shown below:
Budget statement for period III
Department: AENP Department
| ACTUAL RESULTS GH₵’000 | BUDGET GH₵’000 | VARIANCES GH₵’000 | |
|---|---|---|---|
| Units produced | 37,500 | 36,000 | |
| Labour hours | 106,050 | ||
| Sales | 2,325 | 2,232 | 93 (F) |
| Material cost | 756 | 720 | (36) (A) |
| Labour cost | 369 | 360 | (9) (A) |
| Variable overhead | 237 | 216 | (21) (A) |
| Fixed overhead | 177 | 168 | (9) (A) |
| Other overhead | 123 | 120 | (3) (A) |
| Administration cost | 150 | 144 | (6) (A) |
| Total cost | 1,812 | 1,728 | (84) (A) |
| Profit | 513 | 504 | 9 (F) |
Mr. N. Kevin
Head of Department
Subsequent interaction with Mr. Kevin – AENP Department Manager, revealed that the budget statement presented was based on 36,000 units with a standard labour content of 2.85 hours per unit.
Mr. Goodluck observed that Kevin was not enthusiastic about the budget system. He saw it as a pressure system imposed by the company to penalize some managers. He pointed out that the system was hurriedly introduced by Sano Consult about twelve months ago. The consultant never took time to provide explanations that could assist users to understand the system. The experienced AENP Manager was doubtful about the competence of the consultant. He was of the opinion that the system introduced in APP Limited was either a ready-made one developed for another 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 departments, and so the need to address the situation became very urgent.
The task of making the budgeting system more useful and acceptable in a biased environment like this, no doubt, seems difficult, but your advice to Mr. Goodluck will assist tremendously in resolving the issue.
Required:
(a) Redraft the budget statement in a more informative manner.
(b) State the behavioural problems brought out in this situation.
(c) State the steps you think Mr. Goodluck should take.
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