Froden Ltd manufactures acoustic guitars. Froden has hired you as an accountant. Before leaving the company, the previous accountant had prepared a performance report for April. The performance report prepared by the previous accountant is given below.

The management of Froden Ltd is happy with the performance report. The management has decided to use the excess funds to produce more units. The management has decided to increase production for June by 10 per cent instead of 5 per cent, as planned earlier. However, you feel the report is misleading and inform the management of this.

Required
1. Based on your inputs, the management wants to reconsider its decision. Prepare a new performance report using the flexible budget technique showing only spending variance.
2. Compare the performance report prepared by the previous accountant with the one prepared by you. Discuss if the company should increase its production by 10 per cent or if it should reconsider its decision.

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Number of guitars produced Variable overhead costs: Indirect materials (glue and screws) Electricity Total variable overhead costs Fixed overhead costs Indirect labour wages Supervisory salaries Insurance Utilities (other than electricity) Total fixed overhead costs Froden Ltd Overhead Performance Report for the month ended 30 April Actual 6,000 £5,520 7500 £13,020 9,500 15,000 3,500 4,000 £32,000 Budgeted 7,500 £5,625 7,875 £13,500 10,000 15,000 3,500 4,000 £32,500 Variance 1,500 F £105 F 375 F £480 F 500 F £500 F