Renoir Suits is a high-quality tailor specialising in the production of mens suits. You have been asked
Question:
Renoir Suits is a high-quality tailor specialising in the production of men’s suits. You have been asked by Marin Dixon, the managing director of Renoir Suits to assess its budgeting system as he believes that the current system may be causing dysfunctional behaviour by two of his managers. These are
- Peyton Prichard who is responsible for setting prices and setting the annual sales budget, and
- Morgan Paine, the production manager, whose business unit is a cost centre. Morgan is responsible for the variable and fixed costs of production.
Both managers receive a performance-related wage. Peyton’s pay is closely tied to achieved sales and he receives a bonus for beating sales targets. Morgan’s pay is related to flexible budget cost variances.
Budgeted results for the year ending 31 March 2019 were as follows:
| BUDGET FOR 10,000 SUITS | per suit | ||
| Planned Sales | $ 1,550,000 | $ 155.00 | |
| Direct materials | $ 600,000 | 60.00 | |
| Direct labour | $ 360,000 | + | 36.00 |
| $ 960,000 | 96.00 | ||
| Total Contribution | $ 590,000 | 59.00 | |
| Fixed Costs | $ 275,000 | ||
| Net Profit | $ 315,000 |
Peyton is very glad to report that the actual sales volume for the last year was 12,000 suits with total revenues of $1,800,000. However, although sales number went up, managing director Dixon feels uncomfortable with Peyton’s reported achievements. Morgan has also expressed some reservations, especially because her performance looks poor. Below is the information about actual results.
| ACTUALS FOR 12,000 SUITS | per suit | ||
| Actual sales | $ 1,800,000 | $ 150.00 | |
| Direct materials | $ 630,000 | 52.50 | |
| Direct labour | $ 540,000 | + | 45.00 |
| $ 1,170,000 | 97.50 | ||
| Total Contribution | $ 630,000 | 52.50 | |
| Fixed Costs | $ 260,000 | ||
| Net Profit | $ 370,000 |
Dixon is worried about having to pay Peyton a bonus for achieving a high sales revenue and has therefore asked you to analyse last year’s budget variances in depth.
Required:
Prepare a report for the Marin Dixon, the managing director of Renoir Suits, that covers the questions below:
a) Calculate A flexible budget for the year ended 31 March 2019.
b) A comprehensive calculation of the budget variances, showing your calculations.
c) A reconciliation of the actual and budgeted results.
d) An analysis of the information calculated in Questions (b) and (c) AND recommendations for actions Marin might take in response, this to improve his immediate understanding of the budget variances
e) An explanation of the benefits and potential pitfalls of Renoir’s current budgeting and performance management system with recommendations for how next year’s budget should be set. Include advice that addresses Marin’s worries regarding paying Peyton Prichard a bonus.
Expert Answer:
