Unique Ltd manufacture different products and each product line has a cost centre with a Product Manager
Question:
Unique Ltd manufacture different products and each product line has a cost centre with a Product Manager responsible for the total costs of the centre. They currently operate a budgetary control system where budgets are set by Senior Management and communicated to the Product Managers. At quarterly progress review meetings Product Managers are required to respond to Performance Reports which they receive a week before the meeting, and if required, budget amendments are made after the meeting.
The Performance Reports are used to assess Product Managers' performance and their potential for a bonus. They feel that the current budgetary control system is “unfair” and have voiced their concerns to Senior Management. After some consideration Senior Management have asked you to review the current system to address the criticisms of Product Managers and suggest improvements.
You are given the following Performance Report for one cost centre below which shows actual spending to be 44% over budget.
QUARTERLY PERFORMANCE REPORT | ||||
Cost Centre | Creative | |||
Budget Period | 3 months to 31 March 2021 | |||
Budget | Actual | Variance | % | |
Production (units) | 10,000 | 12,500 | (2,500) | (25) |
Expenditure | £ | £ | £ | |
Raw materials | 60,000 | 54,000 | (6,000) | (10) |
Direct labour | 120,000 | 142,000 | (22,000) | (18.33) |
Machinery Maintenance | 12,000 | 14,000 | -2,000 | (16.67) |
Depreciation | 14,000 | 14,000 | 0 | 0 |
Overheads (rent, rates, insurance) | 35,000 | 40,000 | (5,000) | (14.29) |
supervisors wages | 40,000 | 42,000 | (2,000) | (5) |
Total Costs | 281,000 | 306,000 | (25,000) | (44) |
Produce an informal report to the Senior Management of Unique Ltd, critically evaluating the current budgetary control reporting system. As part of your report you should include: issues or criticisms with the current system and the Performance Reports a revised Quarterly Performance Report for cost center "Creative" which recalculates the budget and variances to more accurately report actual performance an explanation and rationale for all assumptions and modifications made in your modified Performance Report. Supporting theoretical references may be used but the report must focus on the practical application of theoretical concepts to the specific situation. Critically discuss the behavioral aspects of budgeting and performance reporting.
Expert Answer:
Report evaluating the current budgetary control reporting system i Inaccurate Method To calculate the Variance In the above report the method used for ... View the full answer
