A company has prepared the following summary from its functional budgets for the year ended 30th September 2013. $000 $000 Sales (100,000 units) 1,500Opening inventory (zero units)nilProduction costs (115,000 units): Direct materials 460 Direct labour 575 Variable overhead 115 Fixed overhead 2301,380Closing inventory (15,000 units)180Cost of Sales 1,200Gross Profit 300Other overhead costs200Net Profit100The directors of the company have now met to review the above statement. They have decided to revise the budget as follows: • Due to competition, reduce the selling price by $5 per unit and despite the reduction in selling price the demand for the product will reduce to 90,000 units.• Increase some of the unit production costs: direct labour by 10% and variable overhead by 5%. No change is expected to any other costs.• Reduce production to 100,000 units.Required: (a) Prepare a summary statement (in the same format as that shown above) which clearly shows the effect of all of the changes proposed by the directors of the company. (6 marks) (b) Discuss the motivational factors in involving functional managers in the setting of functional budgets.
