Medibed manufactures hospital beds. These are complicated mobile platforms with several moving parts. It is located on the outskirts of Bromsgrove and has good connections to the motorway system. Bromsgrove is centrally situated in the UK and has a good quality workforce. Medibed has never experienced any difficulty in finding appropriately trained staff during its expansion over the last 12 years. The business started when George Wright was made redundant from a firm which is now one of its rivals. As a design engineer, George had some ideas about how the hospital beds he was helping to design could be improved. However, before he had the chance to develop these, his previous firm suffered a severe cash crisis and went into administration, emerging as a much smaller operation under new ownership. George invested his £30,000 redundancy pay into his new business, Medibed, and persuaded a local bank to invest a further £70,000 (secured against his domestic residence). Starting with only three employees, Medibed has grown gradually over the years to become a well established, medium-sized company specializing in a single product. George is now 57 years old and has decided to step back from the operational side of the business and cut down his input to one or two days a week. Instead of being both chairman and managing director, he has retained the chairmanship but has recently appointed a new managing director, Alex Medlev, from outside the business. Alex is 43 years old and was the production manager for six years of a firm producing office furniture. It has been a difficult year for Medibed with competition becoming much more aggressive than in previous years. These difficulties can be seen from the following extracts from a recent management meeting chaired by the managing director:
Managing director
You all know that the figures show that the labour force is working below standard. But I€™m not sure I believe it. I walk round the factory every day and I don€™t see any slacking, the atmosphere is good and I have not seen any evidence of demotivation among the operatives. I€™m not convinced our budgetary control system is telling us the whole truth.
Purchasing manager
Well, it has served us well for many years. I€™m not sure we can start to ignore it just because it is telling us something we would prefer was not happening.

Production director
It€™s all very well for you to say that but I think Alex has a point. I realize we have to keep our costs down to remain competitive but I am not convinced sourcing a significant portion of our material components from Eastern Europe was a good idea. I reckon if we had stuck with our original UK suppliers in the first place we would have been better off all round, despite their higher prices. I suggest we reconsider our position on this as soon as possible.
Purchasing manager
I don€™t agree. Just look at the figures and you will see how much money we have saved on our material costs. That is what I was asked to do and I€™ve done it.
Production manager
I admit the figures look good but we€™ve all played budgetary games at some time or other. I think this is an area we really need to tighten up on.
Sales director
I think we should remember that the bottom line is still positive. It has been difficult since we had that quality crisis in the first quarter of the year and had to cancel our attendance at the London Trade Show. But we have managed to stay in the black. Admittedly, our volume is well below the original budget but it could have been a lot worse; our past reputation has helped greatly but we can€™t rely on that any longer. I hope we will soon be in a position to increase our advertising spend up to previous levels but we must maintain the quality of our product. It is absolutely vital to our long-term success. I can€™t stress that enough.
Managing director
I can€™t argue with that but I€™m not convinced our traditional approach to performance and control is sufficient to help us do that and achieve our objectives in today€™s turbulent trading conditions. We are already facing a new wave of cheap imports from the Far East. We€™ve got to be more proactive in improving our performance. Some well-known firms are reputed to have given up budgets and seem to be doing alright without them thank you very much. I know it is drastic but I think we have got to be prepared to be radical in our approach in order to survive. With the agreement of our Chairman, I€™ve just commissioned a report about controlling and improving our corporate performance from the management consulting branch of our auditors. I€™m expecting to receive it in the near future, just after the end of the financial year.

Medibed€™s current budgetary control system
Medibed operates a traditional budgetary control system on a quarterly rather than a monthly basis. The financial reporting is also done quarterly. A significant part of the remuneration for the budget-responsible officers is dependent on their achieving their budgets.

The budget responsibilities are as follows:
Operational area____________________________________ Budget-responsible officer
Sales................................................................................. Sales director
Materials budget............................................................ Purchasing manager
Labour budget............................................................... Production manager
Variable overhead budget............................................. Production manager
Fixed overhead budget:
Marketing........................................................................ Sales director
Production....................................................................... Production director
Administration................................................................ Managing director
The current financial year has just ended and the actual results for quarter 4 (Q4) are expected very soon. The results for the previous three quarters have been known since just before the management meeting two months ago.

Additional information

— All these budgets have already been fl exed to the actual level of activity.

— The original budget profi t (OBP) is £7,550,000.

— The budgeted selling price of one bed is £10,000.

— The actual selling price of one bed is £10,500.

— Variable overheads are absorbed on a labour hour basis.

— Labour operatives can earn bonuses dependent on the completion of their tasks in less than the standard times allowed.
List of attached schedules
1 Summary budget for year and by quarter
2 Materials budget for year and by quarter
3 Labour budget for year and by quarter
4 Variable overheads budget for year and by quarter
5 Marketing fi xed overheads budget for year and by quarter
6 Production fi xed overheads budget for year and by quarter
7 Administration fi xed overheads budget for year and by quarter
8 Sales budget for year and by quarter
9 Summary of actual results
10 Extracts from materials and labour fl exed budgets for Q4
11 Extracts from materials and labour actual results for Q4
12 Variance analysis for the fi rst three quarters

Tasks:
1 Variance analysis Using the information provided:
a) Perform a variance analysis on the Materials (Motors) budget extract for Q4. (6 marks)
b) Perform a variance analysis on the Labour (Grade C) budget extract for Q4. (8 marks)
c) Perform a variance analysis of all budget items for Q4 and present them in a table. (4 marks)
d) Perform a variance analysis of all budget items for the year and present them in a table. (4 marks)
e) Calculate the sales volume variance and the sales price variance for the year. (4 marks)
f) Create a profit reconciliation statement for the year. (4 marks)

g) Comment on Medibed€™s performance for the year. (20 marks)
Note: Perform the variance analyses in as much detail as the information given will allow.
(Sub-total 50 marks)
2. Budget games

Define the term €˜budget games€™; give six examples of these and state four negative effects they have on companies. (14 marks)
3. Beyond Budgeting
If Medibed adopted the Beyond Budgeting management model and abolished its budgetary control system, state six measures you would recommend it to take to fi ll the resulting vacuum. (12 marks)
4. Balanced scorecard
Design a balanced scorecard for Medibed utilizing three items for each of the four perspectives. (24 marks) (Total 100 marks)

Transcribed Image Text:

1. Summary budget for year and by quarter Q2 Q1 Q3 Q4 Year Item (£000) Materials 3,605 3,738 2,136 534 3,429 1,936 2,849 1,628 13,621 7,760 Labour 2,060 Variable ohds 460 407 515 1,916 Fixed ohds: 6,942 5,821 Marketing 1,922 1,701 1,465 1,854 Production 1,602 1,221 1,453 1,545 Administration 748 645 570 721 2,684 Total costs 10,680 9,624 8,140 10,300 38,744 Sales revenue 11,550 11,890 10,990 9,100 43,530 Profit 1,210 1,250 1,366 960 4,786 2. Materials budget for year and by quarter Q1 Year Q2 Q3 Q4 Item (£000) 1,495 Frame Mattress Motors Accessories 1,372 1,028 480 549 1,140 855 399 455 1,442 1,082 504 577 5,449 4,086 1,906 2,180 13,621 1,121 523 599 3,738 Total 3,429 2,849 3,605