***REQUIREMENT: To prepare a revised budgetary control report.

Cucumber Ltd is a company, based in Manchester UK and established in 2005, that produces smart phones. It is a relatively small company, with a highly skilled work force. Despite the global recession, the company is still profitable due to its excellent products and reputation for customer service The company has six key departments Marketing, Customer Support, Finance, Manufacturing, Research and Development, and HR. The company Mission statement is to be Recognised by customers and employees as a progressive, high quality, supplier of innovative mobile products at affordable prices Key financial targets The CEO, Mr Armstrong, has recently had a formal strategy meeting with his fellow directors to confirm the Mission Statement, and they have agreed that the financial targets for each of the next three years should be a Return on Capital Employed of 18% and a profit before tax of 5m. With a 150 selling price per unit and a 100 variable cost per unit, we are working flat out as it is on the shop floor, and we need to spend a lot more on product development to make any significant improvements to the product. The head of the accounting department noted that expanding production facilities will increase the fixed cost to 1,500,000. Manufacturing issues Although manufacturing is generally very efficient, and of a high standard, the Manufacturing Director, Mr Brown, is anxious to maintain and even improve this performance. He intends to implement a policy that all direct manufacturing staff should be qualified to NVQ level 4, and all supervisors should be qualified to BSc (Hons) level. To assist with quality improvement. Mr Brown has introduced a new quality measurement system, and has set a target for defective finished products requiring rectification at a maximum of 5%. Customer Support The reputation with its customers is a crucial area for Cucumber Ltd, and a customer satisfaction survey request is sent to every customer within 4 weeks of a completed sale. The target is for the proportion of customers rating the company as Excellent to be at least 80%. As many of the sales are direct to customers, telephone response within the Customer Support team is extremely important. The Customer Support Manager is concerned about the speed of response to telephone calls and would like to introduce an objective of answering all calls within four rings. Employee retention The HR department has been looking very closely at employee retention and is concerned that there is a fairly rapid movement of skilled production operatives within companies in the Manchester area. The current annual staff turnover is 25% and the objective, to support the Mission Statement, is to reduce this to 15%. Current Developments The previous Finance Director has been recently dismissed, following a heated meeting with the CEO about weaknesses in budgetary reporting and control. The company has taken on a new Finance Director, Mr Finlayson, who is a qualified accountant and has also recently gained an MSc in Management. As part of his induction, Mr Finlayson has talked to all the key staff and has identified a number of areas of concern. Three areas have particularly worried him. 1. The CEO has explained that he is fully aware of the importance of an annual budgetary process and detailed budgetary control, but is having great difficulties in explaining this to his fellow directors, as the overall process at Cucumber Ltd has fallen into disrepute. He would also like to clearly understand the number of units that the company must sell in order to achieve the target profit of 5m per annum that was set at the recent strategy meeting, as this has never been properly defined. 2. In a discussion with Mr Finlayson, the manager of the Screen Making department, Mr McDonald noted that there were major concerns about the budget control reports that were issued by the previous Finance Director. They were usually issued on the last Friday of each month, with data for the previous month. Mr McDonald was very disappointed at the indication that he was doing a bad job, with adverse variances reported, when in fact his team had worked hard to achieve the level of output that had been requested of them. Mr McDonald offered a copy of a recent report as an example of the issues.

3. Cucumber Ltd would like to expand the production of current products. Four proposals have been submitted, but only one of the proposals can be accepted. The following information was obtained for the proposals. The cash flows for year 5 include, where applicable, the sale of the fixed assets purchased (year 0) at the residual value. The companys cost of capital is 10%.

4. Mr Finlaysons general feeling from his many discussions was that the company was generally staffed by a committed team, but that the overall strategy which the Directors had devised was not clearly known to the operating teams. They were unsure what their part was in achieving the objectives of the company and had no plans or projects for improvement. During his MSc Management course, Mr Finlayson had learned about the Balanced Scorecard approach and decided to consider if it would be helpful for this company. Having collected a large amount of information about the company and its issues, Mr Finlayson decided to free up his diary for 3 days and think seriously about the recommendations to his fellow directors at the monthly board meeting.

BUDGETARY CONTROL REPORT: URGENT Date 25-Oct-17 Cost centre Screen Product Responsible Manager Mr McDonald Report cost period 1 Sept 2017 - 30 Sept 2017 Productive Activity Costs Materials Supplies Direct Labour Indirect labour Depreciation Budget Actual Variance 3000 units 4,000 units % 31000 39000 -8000 Adverse -26% 11000 12500 -1500 |Adverse -14% 9000 9500 -500 Adverse -6% 5000 5200 -200 Adverse -4% 2000 2000 0 0% Share of Sales costs 2500 2800 -300 |Adverse -12% Apportioned overhead 10000 15000 -5000 Adverse -50% Total 70500 86000 -15500 Adverse -22% Proposal 1 Proposal 2 Proposal 3 Proposal 4 Cash flows (ms) -19 2 8 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 -24 16 12 8 4 -8 -16 6 8 6 6 4 -32 6 10 18 16 12 8 12 10 O 0. O 8 Residual value Discount rates at 10% 0 1.00 1 0.91 2 0.83 3 0.75 4 0.68 5 0.62 Discount rates at 30% 0 1 1 0.77 2 0.59 3 0.46 4 0.35 LO 5 0.27 BUDGETARY CONTROL REPORT: URGENT Date 25-Oct-17 Cost centre Screen Product Responsible Manager Mr McDonald Report cost period 1 Sept 2017 - 30 Sept 2017 Productive Activity Costs Materials Supplies Direct Labour Indirect labour Depreciation Budget Actual Variance 3000 units 4,000 units % 31000 39000 -8000 Adverse -26% 11000 12500 -1500 |Adverse -14% 9000 9500 -500 Adverse -6% 5000 5200 -200 Adverse -4% 2000 2000 0 0% Share of Sales costs 2500 2800 -300 |Adverse -12% Apportioned overhead 10000 15000 -5000 Adverse -50% Total 70500 86000 -15500 Adverse -22% Proposal 1 Proposal 2 Proposal 3 Proposal 4 Cash flows (ms) -19 2 8 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 -24 16 12 8 4 -8 -16 6 8 6 6 4 -32 6 10 18 16 12 8 12 10 O 0. O 8 Residual value Discount rates at 10% 0 1.00 1 0.91 2 0.83 3 0.75 4 0.68 5 0.62 Discount rates at 30% 0 1 1 0.77 2 0.59 3 0.46 4 0.35 LO 5 0.27