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LM operates a parcel delivery service. Last year its employees delivered 15,120 parcels and travelled 120,960 kilometers. Total costs were $194,400.
LM has estimated that 70% of its total costs are variable with activity and that 60% of these costs vary with the number of parcels and the remainder vary with the distance travelled.
LM is preparing its budget for the forthcoming year using an incremental budgeting approach and has produced the following estimates:
* All costs will be 3% higher than the previous year due to inflation
* Efficiency will remain unchanged
* A total of 18,360 parcels will be delivered and 128,800 kilometers will be travelled.
Calculate the following costs to be included in the forthcoming year's budget:
(i) the total variable costs related to the number of parcels delivered.
(ii) the total variable costs related to the distance travelled.

• A. Parcel related cost for next year = $109,118; Distance related costs for next year = $89,699
• B. Parcel related cost for next year = $105,306; Distance related costs for next year = $30,590
• C. Parcel related cost for next year = $112,308; Distance related costs for next year = $79,590
• D. Parcel related cost for next year = $112,118; Distance related costs for next year = $59,699
• E. Parcel related cost for next year = $115,306; Distance related costs for next year = $31,590

A medium-sized manufacturing company, which operates in the electronics industry, has employed a firm of consultants to carry out a review of the company's planning and control systems. The company presently uses a traditional incremental budgeting system and the inventory management system is based on economic order quantities (EOQ) and reorder levels. The company's normal production patterns have changed significantly over the previous few years as a result of increasing demand for customized products. This has resulted in shorter production runs and difficulties with production and resource planning.
The consultants have recommended the implementation of activity based budgeting and a manufacturing resource planning system to improve planning and resource management.
Select ALL the benefits for the company that could occur following the introduction of an activity based budgeting system.

• A. The approach under an activity based system is to make arbitrary cuts in order to meet overall financial targets.
• B. Activity based budgeting allows the identification of value added and non-value added activities and ensures that cuts are made to non-value added activities. ABB is also useful for review of capacity utilization.
• C. ABB systems present costs under functional headings i.e. the emphasis is on the nature of the cost. The weakness of this approach is that it gives little indication of the link between the level of activity and the cost incurred.
• D. Under an activity based budgeting system, resource allocation is linked to the strategic plan is prepared after considering alternative strategies. This approach ensures that new activities that are required to meet the company's strategic objectives are included in the budget.
• E. Under an activity based budgeting system the focus is on existing resources and operations. Adjustments are then made for changes in activity and price which results in past inefficiencies being perpetuated.
  Under a traditional budgeting system, only resources that are needed to perform activities required to meet the budgeted production and sales volumes are included.
• F. Activity based techniques including activity based budgeting focus on the outputs of a process rather than the input to the process. This approach provides a clear framework for understanding the link between costs and the level of activity. It allows the ranking of activities and the determination of how limited resources should be allocated across competing activities.

'A zero-based budgeting system involves establishing decision packages that are then ranked in order of their relative importance in meeting the organization's objectives'.
Which of the following is true regarding he difficulties that a not-for-profit organization may experience when trying to rank decision packages.
Select ALL true statements.

• A. In a public sector body, for example, decision packages will relate profit making activities.
• B. The activities that are being proposed in a budget are described in decision packages. There will often be more than one decision package proposed for an activity.
• C. The activities that are being proposed in a budget are described in variable packages. There will often be more less than one decision package proposed for an activity.
• D. Management may decide to accept packages even though the activity was done last year. In this way the organization is said to be starting from a 100% cost base with each package given due consideration.
• E. Management may decide to reject packages even though the activity was done last year. In this way the organization is said to be starting from a zero base with each package given due consideration.
• F. Some of these packages will be mutually inclusive and will require management to select the best solution to the issue involved.
• G. Some of these packages will be inclusive and will require operations to select the best solution to the issue involved.
• H. In a public sector body, for example, decision packages will relate to very disparate activities.
• I. Each decision package is evaluated. Its costs are compared to its benefits and net present values or other measures calculated.

TP makes wedding cakes that are sold to specialist retail outlets which decorate the cakes according to the customers' specific requirements. The standard cost per unit of its most popular cake is as follows:

The general market prices at the time of purchase for Ingredient A and Ingredient B were $23 per kg and $20 per kg respectively.
TP operates a JIT purchasing system for ingredients and a JIT production system; therefore, there was no inventory during the period.
Prepare a statement which reconciles the flexed budget material cost and the actual material cost. Your statement should include the material price planning variances, and the operational variances including material price, material mix and material yield.
What was the material price planning variance for ingredient A?

• A. The Material price planning variance - Ingredient A was $71 000 F
• B. The Material price planning variance - Ingredient A was $72 000 F
• C. The Material price planning variance - Ingredient A was $75 000 F
• D. The Material price planning variance - Ingredient A was $73 000 F

TP makes wedding cakes that are sold to specialist retail outlets which decorate the cakes according to the customers' specific requirements. The standard cost per unit of its most popular cake is as follows:

The general market prices at the time of purchase for Ingredient A and Ingredient B were $23 per kg and $20 per kg respectively. TP operates a JIT purchasing system for ingredients and a JIT production system; therefore, there was no inventory during the period.
Discuss the usefulness of the planning and operational variances calculated for TP's management.
Select ALL the TRUE statements.

• A. The use of planning and operational variances will enable TP's management to draw a distinction between variances caused by factors extraneous to the business and planning errors (planning variances) and variances caused by factors that are within the control of management (operational variances).
• B. If planning and operational variances are not distinguished, there is potential for dysfunctional behavior especially where the manager has been operating efficiently and performance is being judged by factors outside the manager's control. In the case of TP it became evident during the period that the prevailing market prices for materials were significantly less than those set during the budget process.
• C. Where a revision of standards is required due to environmental changes that were not foreseeable at the time the budget was prepared, the planning variances are controllable.
• D. The purchasing manager's performance can't be compared with the adjusted standards that reflect the conditions the manager actually operated under during the reporting period.
• E. Standards that failed to anticipate known market trends when they were set will reflect faulty standard setting.