SUGGESTED SOLUTION TO ACTIVITY 11.3

Key issues that appear to have affected Eddie Bowyer are
o
He was not involved in the preparation of the budget, this was done by senior
management with the accounts department.
o
He does not appear to have received any training in the budgetary control
process.
o
Management appear to hold him accountable for adverse cost variances even
though they are the result of higher production requirements.
o
He is subject to criticism for costs which, although allocated to his
department, are not within his control or responsibility.

The report could be better presented as follows:
Snacks Ltd
Cost Centre
PERFORMANCE REPORT
No.
Units of output
Manager Bowyer
Date
Original
Flexed
Budget
Budget Actual Variance A/F %
6000
8000
8000
£
£
£
£
3000
4000
3900
100
Controllable Costs
Sandwich Fillings
F
3%
Bread
1000
1333
1250
83
F
6%
Direct Wages
800
1067
950
117
F
11%
4800
6400
6100
300
F
5%
Indirect wages
500
500
500
Other attributable costs
300
300
310
10
A
3%
Total fixed costs
800
800
810
10
A
1%
Total Controllable Costs
5600
7200
6910
290
F
4%
Depreciation
200
200
200
Selling and Distribution
250
250
280
30
A
12%
Apportioned Overhead
1000
1000
1100
100
A
10%
1450
1450
1580
130
A
9%
Total variable costs
0%
Non-Controllable Costs
Total
Costs
0%
Non-Controllable
This report is separated into two key sections, the costs that he has responsibility to control,
and those which are allocated to his department. The latter are presented to him purely for
information, to enable him to see the overall estimated costs for his department.
The budget for his controllable costs has been modified as follows:

Those budget costs which are deemed to vary according to the quantity of product
produced – in this case the Sandwich Fillings, Bread, and Direct Wages, have been
“flexed” to adjust the cost allowance to reflect the actual quantity that he has been
required to produce. These are variable costs, and will be further explained in the
section on Cost Types and Cost Behaviour.
The simple calculation is to multiply the original budget by the new quantity required
and divide by the original quantity –
Sandwich Fillings
£3000 / 8000 x 6000 = £4000 – the flexed budget
Other budget costs which are deemed not to vary with the level of production are left
unchanged.

Other issues identifies could be addressed by fully involving Eddie in the budget
process and arranging training in the interpretation of budget reports and their place
in the overall control and monitoring process. Finally, the tone of communication
should be changed so that variances are seen as part of a learning and improvement
process, rather than an element of a ‘blame’ culture.