MT is a manufacturer of children’s Mobile Phones. In the Budget-setting process,
ID: 2424950 • Letter: M
Question
MT is a manufacturer of children’s Mobile Phones. In the Budget-setting process, Budget X was prepared by lower and middle management. Budget Y was prepared by senior management. X Y Unit Sales 20000 30000 Dollar Sales $600,000 $900,000 Less: Variable expenses: Direct materials 260,000 360,000 Direct Labour 40,000 60,000 Variable Overhead 60,000 75,000 Variable Selling and administrative expenses 60,000 60,000 Total Variable expenses $420,000 $555,000 Contribution margin $180,000 $345,000 Less: Fixed expenses: Manufacturing Overhead $60,000 $50,000 Selling and administrative 100,000 80,000 Taxes and Interest 10,000 10,000 Total fixed Expenses $170,000 $140,000 Net Profit (Loss) $10,000 $205,000 Required a) Calculate the cost per unit for the Variable costs (2 marks) b) Why do you think budget X has high costs and low sales forecasts? (2 marks)c) Why do you think budget Y has low costs and high sales forecasts? What are the behavioural of this top-down approach? (2 marks)
d) How should the two groups participate to come to a consensus on the budget? What are the advantages of this approach? (2 marks)
Explanation / Answer
a. Variable cost per unit:
b. Budget X has high costs and low sales bacause a lot of budgetary slack ( also known as budgetary padding) has been built into it in order to avoid negative performance appraisals. It has been compiled by line managers who normally are resistant to the budget, as they see it as being only about limiting spending, and about performance appraisal, and can seldom see it as forward looking.
Budget X Budget Y Unit sales 20,000 30,000 Dollar sales 600,000 900,000 Less Variable expenses Direct materials 260,000 360,000 Direct labor 40,000 60,000 Variable overhead 60,000 75,000 Variable selling and administrative expenses 60,000 60,000 Total variable expenses 420,000 555,000 Variable cost per unit $ 21 $ 18.5Related Questions
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