Question 2
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

Budget
Actual

Sales volume (units)
1,300
1,180

£
£

Sales revenue
383,500
348,100

Direct material
104,000
91,450

Direct labour
71,500
70,800

Production overheads
55,750
55,100

Selling & installation costs
109,750
95,280

Administration costs
26,500
26,800

Profit
16,000
8,670

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

Sales (units)
Total cost (£)

October
1,250
106,000

November
1,550
128,500

December
1,400
118,500

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.

Required

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.