Foreign Direct Investment

(b) Describe the different functions/purposes of budgets and how they can conflict with each other.

(4 marks)

Roles

Planning – annual operations

Co-ordinating – the activities of various parts of the business

Communicating – plans to various managers

Motivating – managers to achieve goals

Evaluating – the performance of managers

Conflict

Because a single budget system is used for several purposes there is a danger aims may conflict.

Eg Planning and motivation – demanding budgets to motivate for maximum performance but are unsuitable for planning purposes as these should be based on what is expected to be achieved and is therefore realistic.

Eg Planning and performance evaluation – for planning budgets are set in advance based on anticipated outcomes. Comparison of the actuals vs the original budget may not be appropriate for performance evaluation as some of the changes in circumstances may be out of the control of the manager being assessed. This could also be the case even if a flexed budget is used.

(e) Comment on the performance of Eagle Ltd for the month of January referring to the statement prepared in part (d) above, and include suggestions for possible reasons for the variances given.                                        

(6 marks)

Overall contribution less than budget

Material more expensive (£/kg) than std (std £/kg set too low, better quality material),  partially offset by efficient use (std usage set too high, better quality material)

Labour cheaper rate (£/hr) than std (std £/hr set too high, lower grade workers) and more efficient than std (std hours set too high, better quality material)

Variable overheads more expensive than std (rate/hr) (std £/hr set too low, power/electicity price increases) partially offset by less usage due to labour efficiency (better quality material

Sales vol contribution favourable due to high sales volume probably as a result of reducing the selling price/unit from £8 to £7.8 leading to an adverse sales price variance.

(d)  What is the “controllability principle”?

(c) Name, and briefly describe, two alternative methods, other than the one used above, of allocating costs to joint products

                                                                                        (4 marks)

Physical measures method

Net realisable value method

Constant gross profit percentage method