EF manufactures and sells three products, X, Y and Z. The following production overhead costs are budgeted for next year:

Required:
Calculate the total budgeted production overhead cost for each product using activity based budgeting.

• A. The total budgeted production overhead cost was $ 2 195 000
• B. The total budgeted production overhead cost was $ 1 305 000
• C. The total budgeted production overhead cost was $ 1 188 000
• D. The total budgeted production overhead cost was $ 1 285 000
• E. The total budgeted production overhead cost was $ 1 258 000

A major company sells a range of electrical, clothing and homeware products through a chain of department stores. The main administration functions are provided from the company's head office. Each department store has its own warehouse which receives goods that are delivered from a central distribution center.
The company currently measures profitability by product group for each store using an absorption costing system. All overhead costs are charged to product groups based on sales revenue. Overhead costs account for approximately one-third of total costs and the directors are concerned about the arbitrary nature of the current method used to charge these costs to product groups.
A consultant has been appointed to analyses the activities that are undertaken in the department stores and to establish an activity based costing system.
The consultant has identified the following data for the latest period for each of the product groups for the X Town store:

Calculate the total profit for each of the product groups:
.... using the current absorption costing system;

• A. The profit or loss in $ was.... Clothing 85; Electrical 36; Homeware (28)
• B. The profit or loss in $ was.... Clothing (175); Electrical 86; Homeware 22
• C. The profit or loss in $ was.... Clothing 192; Electrical (56); Homeware 148
• D. The profit or loss in $ was.... Clothing 122; Electrical 56; Homeware (178)

JRL manufactures two products from different combinations of the same resources. Unit selling prices and unit cost details for each product are as follows:

* Refer to your answer in the previous question.
The optimal solution to the previous question shows that the shadow prices of skilled labour and direct material A are as follows:
Skilled labour $ Nil Direct Material A $11.70
Explain the relevance of these values to the management of JRL.
Select ALL the true statements.

• A. In a situation such as this, where a number of resources are scarce, the shadow price of any particular scarce resource will depend on whether or not the resource is not binding.
• B. Since material A is one of the binding constraints, if the availability of material A could be increased by one unit, this would change the optimal plan.
• C. The shadow price for skilled labour is NIL because although there is a shortage of skilled labour it does have a constraining effect on output of JR as other resources are more scarce.
• D. The decrease in contribution as a result of this change is the value of the shadow price of material A. The shadow price thus represents the maximum premium that should be paid for an additional unit of material A.
• E. The shadow price equals the additional contribution that would be earned from one extra unit of a scarce resource.

Explain the advantages of management participation in budget setting and the potential problems that may arise in the use of the resulting budget as a control mechanism.
Select all the correct answers.

• A. Participation in budget setting can cause problems; in particular, managers may attempt to negotiate budgets that they feel are easy to achieve which gives rise to "budget padding" or budgetary slack.
• B. Managers will not 'empire build' because they don't believe that the size of their budget reflects their importance within the organization.
• C. Participation in budget setting can reduce the information asymmetry gap that can arise when targets are imposed by senior management. Imposed targets are likely to make managers feel demotivated and alienated and result in poor performance.
• D. A purposes of budgeting is to act as a control mechanism, with actual results being compared against budget.
• E. Another purpose of a budget is to set targets to motivate managers and optimize their performance.
• F. The participation of managers in the budget setting process has several advantages. Managers are more likely to be motivated to achieve the target if they have participated in setting process has several advantages. managers are more likely to be motivated to achieve the target if they have participated in setting the target.

XY, a not-for-profit charity organization which is funded by public donations, is concerned that it is not making the best use of its available funds. It has carried out a review of its budgeting system and is considering
replacing the current system with a zero-based budgeting system.
Select ALL the potential advantages AND disadvantages for the charity of a zero-based budgeting system.

• A. The creation of decision packages and their subsequent ranking by top management is very time consuming and costly. The charity will need to assess whether the benefits of the system outweigh the costs involved.
• B. In an organization like a charity, the decision packages are not very disparate and difficult t compare.
• C. It avoids the complacency inherent in the traditional incremental approach where it is assumed that future activities will be very similar to current ones.
• D. It discourages a questioning approach by focusing attention not only on the cost of the activity but on the benefits it provides. The charity managers will not articulate the benefits encouraging them to think clearly about the activities.
• E. Preparation of the decision packages will normally require the environment of many employees. This environment may produce useful ideas and promote job satisfaction.
• F. In applying traditional budgeting, 'activities' may result in functional departments rather than cross functional activities and thus distract attention from the real cost-reduction issues.