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    I've got a question saying: Q1) prepare the budgeted trading profit and loss account.

    So then I've ended up with a net loss (the budgeted figure) instead of a net profit.

    But then the next question tells me to 2) calculate the actual profit using the budgeted profit figure from the 1st question.

    So, I was just wondering if it is possible to use a budgeted loss figure to then work out the actual profit or it can be an actual loss figure?

    Or is it because I've done the 1st question wrong, so then I will get an incorrect answer for my 2nd question.

    If this is the case, does direct labour go into the budgeted profit and loss account or not?
    I've put it in the expenses section but should it even be in the budgeted trading p + l account or should it be in the budgeted manufacturing account instead? Should it be in the cost of sales section rather than the expenses section of the budgeted trading p + l account?

    Btw, this is a past exam paper question from June 2009 Unit 7.

    Thank you for your help!!

    Before I provide help, can you confirm the question involves "Jack Lyn Ltd" and is associated with variance analysis?

    A.A.T :rolleyes:

    Budgeted profit and loss typically should always be a profit. If in the real world a loss occurs in the budget then it would be revised (by lowering direct/indirect costs or by an increase in selling price (or a combination) to ensure a profit is the target. These questions will therefore always have a budgeted profit and in the actual profit it is possible to have a loss giving rise to a significant adverse variance. Calculate the various sub-variances to determine the reasons for the "loss".

    "So then I've ended up with a net loss (the budgeted figure) instead of a net profit." - In Jack Lyn Ltd it is a profit. See solution below.

    Calculations shown in brackets () and at the end (#) means marks.

    Jack Lyn Ltd - Budgeted Trading and Profit and Loss Account for the year ending 31 March 2009.

    Sales (20 400 x £75) 1 530 000 (2)
    Opening stock (6100 x £36) 219 600 (2)
    Purchases (24 480 x £36) 881 280 (2)
    Closing stock [10 180 (1) x 36 (1)] (366 480) (1OF)
    Cost of goods sold (734 400) (1OF)
    Gross profit 795 600 (1)
    Wages 480 000(1)
    Other overheads 120 000 (1)
    (600 000)
    Net profit 195 600 (1OF)
    Total 14 marks

    "If this is the case, does direct labour go into the budgeted profit and loss account or not?" - yes in the p+l.

    It can be misunderstood by the labour costs being called "direct". Rather than over-thinking this question as I would approach it as a typical trading account rather than thinking of a manufacturing account which if asked for "direct labour" would belong there instead.

    (b) Define the term ‘variance’.
    A variance is the difference between the budgeted costs or revenues and the actual costs and revenues (2), being either adverse or favourable (1).

    (c) Identify one possible cause of each of the material and labour sub-variances.
    Materials price variance is favourable as there has been a reduction in the price per metre (1).
    Materials usage is adverse as more material has been used to produce the production units (1). Max 2 marks
    Labour rate is adverse as the workforce are being paid more per hour than budgeted (1).
    Labour efficiency is favourable as the workforce is more efficient producing more per hour (1).

    (d) Calculate the actual profit for the year ended 31 March 2009. Start the calculation with the budgeted profit calculated in 3(a).

    Budgeted profit 195 600 (1OF)
    Sales variances (14 200) (1)
    Materials variances (11 300) (1)
    Labour variances (22 700) (1)
    Actual profit 147 400 (1OF)

    (e) Explain two benefits of using budgets.
    Two benefits are:
    Planning (1), planning capital expenditure around expected cash flows (2)
    Control (1), ensuring that there is enough cash available to buy fixed assets and that an overdraft is not needed (2)
    Performance evaluation (1), rewarding those departments who have achieved a favourable variance, ie saved more costs than expected. (2)
    Monitoring (1), eg each departments’ general performance to compare to the budgets set so that any over or under expenditure can be monitored and
    controlled (2).
    Communication (1), eg the manager within the production department needs to communicate production levels with the sales department (2).
    Motivation (1), eg of employees within a department will be motivated to achieve targets set by budgets, especially if there is a financial reward as an incentive (2).
    Co-ordination (1); each department needs to co-ordinate with the others to achieve the business objectives, eg the production department, sales and purchases departments (2).
    Plus any other valid benefit.
    Max 6 marks

    (f) Calculate and compare the budgeted net profit/sales ratio and the actual net profit/sales ratio.
    Budgeted net profit margin 195 600 (1OF) x 100 = 12.78% (1OF)
    1 530 000 (1OF)
    Actual net profit margin 147 400 (1OF) x 100 = 9.72% (1OF)
    1 515 800(1OF)
    The net profit margin has deteriorated (1) meaning that for every pound of revenue the business is now earning only 9.72p instead of 12.78p (1). 8 marks

    (g) Write a memorandum to the finance director of Jack Lyn Ltd, assessing the financial effects and the non-financial effects of his proposal. - Do you want an answer to this question?

    (g) Write a memorandum to the finance director of Jack Lyn Ltd, assessing the financial effects and the non-financial effects of his proposal.
    To: Finance director of Jack Lyn Ltd
    From: Student
    Date: Date of exam
    Subject: The financial and non-financial effects of the proposal [2 marks]

    Suggested areas:
    1. Financial effects
    The labour cost will be reduced by £75 405 (1)
    480 000 (1) + 22 700 (1) = £ 502 700 (1OF) x 15%
    So it will take nearly two years at this level of saving to cover the cost of the redundancy (1).
    However there may be extra costs involved. The workforce may be paid extra remuneration to compensate for the extra 2.5 hours worked per worker per week (1).
    There may also be an increase in the costs due to the increase in the working day (1) eg electricity/heating costs (1).
    Max 5 marks

    2. Non-financial effects
    Skilled and experienced workforce may be lost which cannot be replaced (1).
    Staff may be unwilling to extend their working day without pay (1).
    Staff may be unwilling to retrain without some financial reward (1).
    Lower staff morale due to fear of future redundancy (1).
    Max 4 marks

    Overall Max 7 marks

    Perhaps the staff could be more efficient and it is the machines, working conditions or quality of material which leads to inefficiency (1). So rather than incur the cost of redundancy, replace the machines or improve the quality of the material and this may further improve the efficiency of the workforce and lead to an even larger favourable efficiency variance (1). Max 2 marks

    9 marks

    Overall 11 marks
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