A company produces trays of pre-prepared meals that are sold to restaurants and food retailers. Three varieties of meals are sold: economy, premium and deluxe.


Discuss the benefits of flexible budgeting for planning and control purposes.
Select all the true statements.

• A. A fixed budget will provide meaningful control information when actual activity differs from budget and variable costs are significant.
• B. If actual sales revenue is compared to a fixed budget it is possible to tell whether a favourable sales variance is due to an increase in units sold or an increase in sales price.
• C. If sales volumes were well above budget, adverse variable cost variances will probably be reported, against the fixed budget, since more variable costs have to be incurred to support the higher level of activity.
• D. If a flexible budget is prepared then the budget variances calculated will provide a better indication of performance since actual results will be compared against an appropriate benchmark.
• E. The fixed budget however provides more insight into actual performance.
• F. Reporting against a fixed budget tells management nothing about the efficiency of operations.

QR uses an activity based budgeting (ABB) system to budget product costs. It manufactures two products, product Q and product R. The budget details for these two products for the forthcoming period are as follows:

The total budgeted cost of setting up the machines is $74,400.
Select TWO potential benefits of using an activity based budgeting system.

• A. Activity based budgeting is useful for the review of quality systems utilization.
• B. Activity based budgeting provides a clear framework for understanding the link between turnover and the level of activity.
• C. Activity based budgeting allows the ranking of activities and the determination of how limited resources should be allocated across competing activities.
• D. Activity based budgeting allows the identification of value added and non-value added activity and ensures that any budget cuts are made to non-value added activities.

GH manufactures a product using skilled labour and high quality materials. The company operates a standard costing system and a just-in-time (JIT) purchasing and production system. The standard selling price and variable costs for one unit of the product are as follows:


Calculate the following variances for October, taking account of the more detailed information regarding the labour mix:
(i) The total labour efficiency variance
(ii) The total labour mix variance
(iii) The total labour yield variance
Select the correct statements.

• A. Labour efficiency variance: $ 78 000 F
• B. Labour mix variance: $ 63 000 A
• C. Labour mix variance: $ 66 000 F
• D. Labour efficiency variance: $ 78 000 A
• E. Labour efficiency variance: $ 88 000 F
• F. Labour mix variance: $ 75 000 F
• G. Labour yield variance: $ 144 000 A
• H. Labour efficiency variance: $ 98 000 A

XY can choose from four mutually exclusive projects. The projects will each last for one year and their net cash inflows will be determined by market conditions. The forecast net cash inflows for each of the possible outcomes are shown below.

If the company applies the maximin criterion the project chosen would be:

• A. Project B
• B. Project A
• C. Project D
• D. Project C

Explain the advantages of management participation in budget setting and the potential problems that may arise in the use of the resulting budget as a control mechanism.
Select all the correct answers.

• A. The participation of managers in the budget setting process has several advantages. Managers are more likely to be motivated to achieve the target if they have participated in setting process has several advantages. managers are more likely to be motivated to achieve the target if they have participated in setting the target.
• B. Participation in budget setting can cause problems; in particular, managers may attempt to negotiate budgets that they feel are easy to achieve which gives rise to "budget padding" or budgetary slack.
• C. Participation in budget setting can reduce the information asymmetry gap that can arise when targets are imposed by senior management. Imposed targets are likely to make managers feel demotivated and alienated and result in poor performance.
• D. A purposes of budgeting is to act as a control mechanism, with actual results being compared against budget.
• E. Managers will not 'empire build' because they don't believe that the size of their budget reflects their importance within the organization.
• F. Another purpose of a budget is to set targets to motivate managers and optimize their performance.