Synchrodot Ltd manufactures two standard products, product 1 selling at 15 and Product 2 selling at 18.

Question:

Synchrodot Ltd manufactures two standard products, product 1 selling at £15 and Product 2 selling at £18. A standard absorption costing system is in operation and summarized details of the unit cost standards are as follows:

The budgeted fixed factory overhead for Synchrodot Ltd is £180 000 (per quarter) for product 1 and £480 000 (per quarter) for product 2. This apportionment to product lines is achieved by using a variety of 'appropriate' bases for individual expense categories, e.g. floor space for rates, number of work staff for supervisory salaries, etc. The fixed overhead is absorbed into production using practical capacity as the basis and any volume variance is written off (or credited) to the Profit and Loss Account in the quarter in which it occurs. Any planned volume variance in the quarterly budgets is dealt with similarly. The practical capacity per quarter is 30 000 units for product 1 and 60 000 units for product 2.
At the March board meeting the draft budgeted income statement for the April/May/June quarter is presented for consideration. This shows the following:

Synchrodot Ltd manufactures two standard products, product 1 selling at

The statement causes consternation at the board meeting because it seems to show that product 2 contributes much more profit than product 1 and yet this has not previously been apparent.
The sales director is perplexed and he points out that the budgeted sales programme for the forthcoming quarter is identical with that accepted for the current quarter (January/February/March) and yet the budget for the current quarter shows a budgeted profit of £120 000 for each product line and the actual results seem to be in line with the budget.
The production director emphasizes that identical assumptions, as to unit variable costs, selling prices and manufacturing efficiency, underlie both budgets but there has been a change in the budgeted production pattern. He produces the following table:

He urges that the company's budgeting procedures be overhauled as he can see no reason why the quarter's profit should be £24 000 up on the previous quarter and why the net profit for product 1 should fall from £4.00 to £2.80 per unit sold, whereas, for product 2 it should rise from £2.11 to £3.16.
You are required:
(a) To reconstruct the company's budget for the January / February/March quarter.
(b) To restate the budgets (for both quarters) using standard marginal cost as the stock valuation basis.
(c) To comment on the queries raised by the sales director and the production director and on the varying profit figures disclosed by the alternative budgets.