SunPower Ltd manufactures, sells, and installs solar panels that are sold to domestic customers. The industry is highly competitive, and the management team reviews the company’s performance on a monthly basis. The trainee Management Accountant has therefore produced a comparison of budgeted and actual performance for April and this is shown below:
Comparison of budgeted and actual performance for April
Sales volume (units)
Selling & installation costs
Production overheads and administration costs are believed to be fixed, whereas selling and installation costs are semi-variable. The selling and installation cost budget was set by taking appropriate information from the results for the last three months of 2019, which are shown below:
Selling and installation costs
Total cost (£)
The Finance Director is concerned that the selling and installation costs budget may have been padded, but the Installation Manager complained that the budget includes costs that she does not control.
Explain what a budget is and state THREE reasons why companies produce budgets.
Calculate the selling and installation costs by using high-low method, with brief explanations of the method you use.
Produce a performance statement for April using flexible budgeting principles. All calculations must be clearly shown.
Explain what “padding the budget” involves and why it might occur.
Discuss whether managers should be evaluated based only on costs and revenues that they control.