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Budgeting Hotel Dining Room Conference Centre Total Capacity 100 rooms 100 seats 200 seats Selling price/unit £75 £35 £40 Material costs/unit £5 laundry £15 food £5 refreshments Other variable costs/unit £5 cleaning £10 labour £1 light & heat Produce a budget that shows the contribution for each of the three services. Rank the three services as to the greatest contributions to profitability. What are the constraints? The marketing manager has asked your advice as to whether to accept EITHER 200 people attending a conference and staying for dinner in two sittings but with no hotel accommodation (which will make it very difficult to sell hotel rooms) OR to refuse the conference booking but to maintain the average 60% hotel occupancy, of which half use the dining room. 16.2 Jethro Turnbull Ltd is a privately owned business. It has budgeted for profits (after deducting depreciation of £35,000) of £125,000. Debtors are expected to increase by £20,000, inventory is planned to increase by £5,000 and creditors should increase by £8,000. Capital expenditure is planned of £50,000, income tax of £35,000 has to be paid and loan repayments are due totalling £25,000. What is the forecast cash position of Jethro Turnbull at the end of the budget year, assuming a current bank overdraft of £15,000? 16.3 Bridgeport PLC has produced the following summary profit budget and cash forecast for the next six months. What assumptions can you make about the business based on these figures? What questions would you want to ask in relation to the figures? Profit budget (in £’000) Jan Feb Mar Apr May Jun Sales 1000 1000 1000 2000 2000 2000 Cost of sales 400 400 400 800 800 800 Gross profit 600 600 600 1200 1200 1200 Overheads 350 350 350 350 350 350 Net profit 250 250 250 850 850 850 Cash forecast (in £’000) Net profit 250 250 250 850 850 850 Capital expenditure -100 -250 Loan repayment -400 Cash flow 150 250 250 600 450 850 Budgetary Control Hunter-gatherer Ltd produces Widgets. The table below shows the budget and actual units sold together with standard costs and actual costs for materials and labour used in the manufacture of Widgets. Data for July 2008: Budget Actual Units of finished Widgets sold 5000 4500 Standard material required (kg per Widget) 1.5 1.7 Actual materials used (kg per Widget) Standard material costs per kg £12.50 £13.00 Actual material cost per kg Standard labour hours required (hours per Widget) 1.2 1.3 Actual labour hours used (hours per Widget) Standard labour costs per hour £14.00 £13.90 Actual labour cost per hour Assume that the quantity of materials purchased and the quantity used are identical. Produce a report that compares the original budget with actual costs for materials and labour in July. Produce a budget versus actual variance report using a flexible budget and calculate the variances on that basis. Calculate both usage and price variances for each of materials and labor. Explain why variance analysis using a flexible budget may be helpful for management control.

Budgeting

Hotel Dining Room Conference Centre Total
Capacity 100 rooms 100 seats 200 seats
Selling price/unit £75 £35 £40
Material costs/unit £5 laundry £15 food £5 refreshments
Other variable costs/unit £5 cleaning £10 labour £1 light & heat
  1. Produce a budget that shows the contribution for each of the three services. Rank the three services as to the greatest contributions to profitability. What are the constraints?
  1. The marketing manager has asked your advice as to whether to accept EITHER 200 people attending a conference and staying for dinner in two sittings but with no hotel accommodation (which will make it very difficult to sell hotel rooms) OR to refuse the conference booking but to maintain the average 60% hotel occupancy, of which half use the dining room.

16.2 Jethro Turnbull Ltd is a privately owned business. It has budgeted for profits (after deducting depreciation of £35,000) of £125,000. Debtors are expected to increase by £20,000, inventory is planned to increase by £5,000 and creditors should increase by £8,000. Capital expenditure is planned of £50,000, income tax of £35,000 has to be paid and loan repayments are due totalling £25,000. What is the forecast cash position of Jethro Turnbull at the end of the budget year, assuming a current bank overdraft of £15,000?

16.3 Bridgeport PLC has produced the following summary profit budget and cash forecast for the next six months. What assumptions can you make about the business based on these figures? What questions would you want to ask in relation to the figures?

Profit budget

(in £’000)

Jan Feb Mar Apr May Jun
Sales 1000 1000 1000 2000 2000 2000
Cost of sales 400 400 400 800 800 800
Gross profit 600 600 600 1200 1200 1200
Overheads 350 350 350 350 350 350
Net profit 250 250 250 850 850 850
Cash forecast

(in £’000)

Net profit 250 250 250 850 850 850
Capital expenditure -100 -250
Loan repayment -400
Cash flow 150 250 250 600 450 850

Budgetary Control

Hunter-gatherer Ltd produces Widgets. The table below shows the budget and actual units sold together with standard costs and actual costs for materials and labour used in the manufacture of Widgets.

Data for July 2008: Budget Actual
Units of finished Widgets sold 5000 4500
Standard material required

(kg per Widget)

1.5 1.7 Actual materials used

(kg per Widget)

Standard material costs per kg £12.50 £13.00 Actual material cost per kg
Standard labour hours required

(hours per Widget)

1.2 1.3 Actual labour hours used

(hours per Widget)

Standard labour costs per hour £14.00 £13.90 Actual labour cost per hour

Assume that the quantity of materials purchased and the quantity used are identical.

  1. Produce a report that compares the original budget with actual costs for materials and labour in July.
  1. Produce a budget versus actual variance report using a flexible budget and calculate the variances on that basis.
  1. Calculate both usage and price variances for each of materials and labor.
  1. Explain why variance analysis using a flexible budget may be helpful for management control.

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