Advise nelson and drake which factors should be considered

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Reference no: EM133164238

Financial Management

Question 1: Flexed Budget

Nelson & Drake Plc, a food manufacturer specialises in the production of frozen cakes and sweet products, selling mainly to supermarkets. The following monthly budget applies to one of its products.

Original budget

	£000	£000
Sales		1,000
Costs:
Ingredients	400
Labour and energy	100
Fixed overheads	300
		800
Profit		200

For the ingredients, a standard quantity of 5 kg per pack is required per product; a standard price of 40p per kg applies in the original budget.

Considerable attention has been given to increasing the market share of this product whilst attempting to maintain its profitability. Consequently, since the preparation of the budget the management team implemented some changes to the manufacture and sale of this product.

These changes were as follows:
i. The product was budgeted to sell for £5.00 per pack but, to promote sales, a price reduction on all sales to £4.50 per pack was made.
ii. The supplier of ingredients was changed, and this secured a price reduction to 37.5p per kg on all ingredient supplies in return for a long-term contract.
iii. The method of working was changed in order to reduce the direct labour and energy costs which are regarded as variable.

All of the above changes applied for the whole of the month just ended and are reflected in the actual results shown below. The management intend, however, to use the original budget, for both cost and volume, as a reference point until the effect of the changes has been evaluated.

The following actual results have just been reported for the month:

Actual results

	£000	£000
Sales		1,080
Costs:
Ingredients	520
Labour and energy	110
Fixed overheads	340
		970
Profit		110

Required:

a) Advise Nelson & Drake which factors should be considered when deciding which variances to investigate.

b) Prepare a flexible budget (for the actual quantity sold in the month just ended) based on the original budgeted unit costs and selling price.

c) Provide a commentary on the variances you have produced. Within this commentary refer to possible interrelationships between the variances and how the level of fixed overheads may be reduced.

Reference no: EM133164238

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