Today is $1$ November $2022.$ It has been decided by the Senior Management Team $($SMT$)$ that a review of FireWorks$$ cost base should be conducted over the coming months.

You arrive at work to find the following email from Savita Sharma, Finance Manager: From: Savita Sharma

To: Finance Officer

Subject: Cost savings

In light of our cost base review, I thought that a good place to start would be a review of the standard costs of our main products. The standard costs were updated to be effective from $1$ July $2022,$ but I am concerned that this update was not robust enough. Due to time constraints, it was done quickly and simply involved increasing the previous year$$s standards by $3\%.$ The SMT would like to review the process of setting standard costs in the hope that it will help to maintain $($and ideally improve$)$ gross profit margins without compromising on product quality.

As well as updating standards, Ben Bruce, Finance Director, thinks we might find additional cost savings if we introduced a zero$-$based budgeting $($ZBB$)$ approach. It has been suggested that we pilot ZBB in our Distribution Centre and if successful we can look to adopt this more widely across the organisation. I had a quick chat about this with Sima Thakar, Head of Warehouse, and will send you some notes from our conversation. $($See Reference material$).$

Jayne Bevin, Human Resources Director, has expressed concern that our attempts to drive down costs may result in resistance from the work force. She questioned why operational managers have only limited involvement in budget setting and suggested that we move to a more participative approach.

Another area of concern is inventory. Our financial statements for the year ended $30$ June $2022$ show that our inventory holding period has remained constant $(67\mathrm{.}9$ SECTION A: SHORT ANSWER TASKS $30$ TASK ONE

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days in $2022$ compared to $68\mathrm{.}2$ days in $2021).$ The seasonal nature of our business means that inventory levels are often much higher than they are at the year end. Therefore, I need to prepare some information to explain the costs and risks of holding inventory to Ben so he can work with the SMT to develop and approve an action plan.

Required:

Produce a draft report that covers the following areas:

How standards are used for planning and control, and issues with increasing the previous year$$s standard costs by $3\%,$ suggesting an alternative approach;

$1\mathrm{.}1$

What is meant by zero based budgeting and the steps involved in creating a budget in this way for our Distribution Centre. $(15)$

$1\mathrm{.}2$

Explain one advantage and one disadvantage of using a more participative $($bottom up$)$ approach to budgeting. $(15)$

Reference material: Notes from budget meeting with Sima Thakar

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Levels of orders during certain periods $($end of spring$/$beginning of summer$)$ are challenging to cope with, often leading to delays in processing them.

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It is company policy that all distribution centre employees, working in the warehouse, must undertake health and safety training and maintenance training for the forklift trucks.