BA2: Planning and control

Answer: B. Budgets are prepared to plan ahead and to provide a benchmark against which actual performance can be controlled. They do not guarantee profit — they are a plan, not an outcome. They do not replace statutory financial statements, which serve external reporting purposes. They are not a tax computation. Planning and control are the two purposes consistently emphasised in the syllabus.

Answer: B. Production budget = sales + closing inventory − opening inventory = 50,000 + 6,000 − 8,000 = 48,000 units. Because closing inventory is lower than opening inventory, some demand is met from existing stock, so production is below sales. The 50,000 figure ignores the inventory movement; 52,000 reverses the adjustment, adding opening and deducting closing; and 64,000 adds both inventory figures to sales.

Answer: A. The value of a cash budget is that it gives advance warning, allowing management to arrange financing or reschedule payments before the shortfall occurs. Raising all prices is a drastic step that could reduce demand and is not the direct response to a timing issue. Ceasing to budget removes the early-warning benefit entirely. A projected shortfall is not an accounting expense — it is a forecast cash position, not a transaction.

Answer: C. Flexing adjusts variable costs to the actual activity level while leaving fixed costs unchanged. Variable cost per unit = £50,000 ÷ 10,000 = £5. Flexed variable cost = 12,000 × £5 = £60,000. Fixed cost remains £30,000. Flexed total = £90,000. The £80,000 figure is the original unflexed budget; £96,000 wrongly flexes the fixed costs as well; and £60,000 is the variable element only. The point of flexing is fair comparison at the actual volume.

Answer: B. Usage variance = (standard quantity for actual output − actual quantity used) × standard price. Standard quantity = 2,000 × 4 = 8,000 kg. Actual used = 8,400 kg. Variance = (8,000 − 8,400) × £3.00 = −£1,200, i.e. £1,200 adverse, because more material was used than standard. The favourable version has the correct figure but the wrong direction; the £840 favourable figure is the materials price variance, (8,400 × £3) − £24,360; and £400 omits the multiplication by standard price.

Answer: B. Efficiency variance = (standard hours for actual output − actual hours) × standard rate. Standard hours = 1,500 × 3 = 4,500. Actual hours = 4,400. Variance = (4,500 − 4,400) × £12 = £1,200 favourable, because fewer hours were used than standard. The adverse version has the right figure but wrong direction; the £2,200 adverse figure is the labour rate variance, (4,400 × £12) − £55,000; and £100 omits multiplication by the standard rate.

Answer: D. Sales volume contribution variance = (actual units − budgeted units) × standard contribution per unit = (5,600 − 5,000) × £8 = £4,800 favourable, because more units were sold than budgeted. In marginal costing the variance is valued at standard contribution, not standard profit. The adverse version has the wrong direction; the £600 figure is the volume difference in units, not valued; and £3,000 uses an incorrect contribution figure.

Answer: A. Buying below the standard price gives a favourable price variance. Lower-grade material is more likely to be wasted or rejected, increasing usage above standard and producing an adverse usage variance. This is a classic illustration of why variances should not be interpreted in isolation: an apparent purchasing saving may be offset by higher consumption elsewhere. The other combinations are inconsistent with the cause described.

Answer: C. A non-financial performance indicator measures performance in units other than money. The number of customer complaints is a measure of service quality and is non-financial. Return on capital employed, gross profit margin and net profit are all financial measures expressed in or derived from monetary amounts. The syllabus stresses that good performance measurement uses both financial and non-financial indicators, especially in service organisations.

Answer: C. Job costing is used where output consists of separately identifiable jobs made to customer specification, such as bespoke printing orders, so that costs can be accumulated per job. The other three describe continuous or homogeneous output, which is suited to process costing — costs are averaged over large volumes of identical output rather than traced to individual jobs.

Answer: B. Purchases budget = material needed for production + closing inventory − opening inventory = 40,000 + 7,000 − 5,000 = 42,000 kg. Because the company wants to raise its inventory, it must buy more than it uses. The 38,000 figure reverses the inventory adjustment, and 40,000 ignores the inventory movement altogether. The logic mirrors the production budget but applied to materials rather than finished units. 52,000 adds both the opening and the closing inventory to the production requirement.

Answer: C. The master budget is the overall summary that consolidates the individual functional budgets (sales, production, materials and so on) into a budgeted income statement, statement of financial position and cash budget for the whole organisation. A single-department budget is a functional budget, a continuously updated budget is a rolling budget, and a capital-only budget is a capital expenditure budget. The master budget brings everything together.

Answer: D. The budget must first be flexed to the actual output. Variable cost per unit = £70,000 ÷ 10,000 = £7. Flexed budget for 11,000 units = 11,000 × £7 = £77,000. Variance = £77,000 − £80,000 = £3,000 adverse, because actual cost exceeded the flexed allowance. The £10,000 adverse figure compares actual cost with the unflexed original budget, which is not a fair comparison at the higher output level.

Answer: A. Price variance = (standard cost of actual quantity) − (actual cost) = (10,000 × £4) − £42,000 = £40,000 − £42,000 = −£2,000, i.e. £2,000 adverse, because the actual price (£4.20/kg) exceeded the standard £4. The favourable version has the wrong direction. The £8,000 figure misapplies the standard price. The price variance isolates the effect of paying more or less than standard for the quantity bought.

Answer: B. Rate variance = (standard rate × actual hours) − actual cost = (6,000 × £10) − £63,000 = £60,000 − £63,000 = −£3,000, i.e. £3,000 adverse, because the actual rate (£10.50/hour) was higher than the standard £10. The favourable version reverses the sign. The £6,300 figure misreads the data. The rate variance measures only the effect of paying a different rate than standard for the hours actually worked.

Answer: C. Under marginal costing, the operating statement reconciles budgeted to actual results using the sales price variance, the sales volume contribution variance and the variable cost variances (materials, labour and variable overhead), with fixed overhead handled separately as a period cost. A fixed overhead volume variance belongs to absorption costing, not marginal costing. Depreciation, amortisation and tax rates are not the reconciling items in this statement.

Answer: D. Responsibility accounting holds a manager accountable only for the costs and revenues within their control, so that performance assessment is fair and motivating. Charging a manager with costs they cannot influence — or with the whole organisation's costs or its tax charge — would be neither fair nor useful. Distinguishing controllable from uncontrollable items is central to designing meaningful responsibility centres.

Answer: B. Because customers pay one month after the sale, the cash received in June relates to May's sales of £50,000. June's sales of £60,000 will be received in July. The £60,000 figure ignores the one-month lag, and £110,000 adds both months as if received together. A cash budget records receipts when the cash actually arrives, not when the sale is made — the timing difference is the whole point of the exercise. £55,000 averages the two months, which ignores the one-month lag.

Answer: C. Variable cost per unit = £48,000 ÷ 8,000 = £6. Flexed variable cost for 9,000 units = 9,000 × £6 = £54,000. Fixed cost stays at £20,000. Flexed total = £54,000 + £20,000 = £74,000. The £68,000 figure is the original unflexed budget. The £76,500 figure wrongly flexes the fixed costs as well. Only variable costs are flexed to the actual activity level; fixed costs remain constant within the relevant range.

Answer: D. Usage variance = (standard quantity for actual output − actual quantity) × standard price = (1,000 × 5 − 5,200) × £6 = (5,000 − 5,200) × £6 = −£1,200, i.e. £1,200 adverse, because 200 kg more than standard was used. The favourable version has the wrong direction. The £200 figure omits the standard price. The usage variance values the excess or saving in quantity at the standard price per kg. £31,200 is the actual quantity at standard price (5,200 × £6), not a variance.

Answer: A. Efficiency variance = (standard hours for actual output − actual hours) × standard rate = (2,500 × 2 − 4,800) × £9 = (5,000 − 4,800) × £9 = £1,800 favourable, because 200 fewer hours than standard were used. The adverse version reverses the sign. The £200 figure omits the standard rate. The efficiency variance values the time saved or lost at the standard rate per hour. £43,200 is the actual hours at standard rate (4,800 × £9), not a variance.

Answer: B. Expenditure variance = (standard rate × actual hours) − actual variable overhead = (4,000 × £3) − £11,600 = £12,000 − £11,600 = £400 favourable, because less was spent than the £12,000 the actual hours should have cost. The adverse version reverses the sign. The expenditure variance compares the variable overhead that should have been incurred for the hours worked with the amount actually incurred. £1,600 adverse does not follow from the rate, hours and spending given.

Answer: C. Buying raw materials on credit increases the material (stores) control account, which is debited, and increases the amount owed, so payables are credited. Debiting payables would reduce the liability, which is wrong for a purchase. The work-in-progress and finished-goods entries relate to later stages of production. Integrated accounts combine cost and financial records, so the cost ledger entries follow normal double-entry principles.

Answer: D. In batch costing, the cost per unit = total batch cost ÷ number of units in the batch = £6,000 ÷ 500 = £12.00. The £0.12 figure inverts the calculation (units relative to cost in the wrong order). Batch costing is used where identical items are produced in distinct batches; the batch cost is accumulated and then spread evenly over the units in that batch to give a cost per unit. £8.33 does not follow from the batch figures.

Answer: D. Production = sales + closing inventory − opening inventory = 30,000 + 4,000 − 9,000 = 25,000 units. Because inventory is being run down by 5,000 units, production is below sales, with the shortfall met from existing stock. The 35,000-unit figure reverses the adjustment, and 30,000 ignores the inventory change. Reducing inventory lets the company produce fewer units than it sells in the period. 43,000 adds both the opening and the closing inventory to sales.

Answer: A. Standard costing sets predetermined costs for materials, labour and overheads, providing a benchmark against which actual results are compared so that variances can be identified, investigated and controlled. It does not replace the cash budget, cannot eliminate variances (it is designed to reveal them), and is unrelated to tax computation. The control benefit of comparing actual against standard is the main purpose.

Answer: B. Sales price variance = (actual price − standard price) × actual units sold = (£19 − £20) × 4,000 = −£1 × 4,000 = £4,000 adverse, because each unit was sold for £1 less than standard. The favourable version reverses the sign. The £1,000 figure ignores the number of units. The sales price variance isolates the profit effect of selling at a different price from standard, valued over the actual quantity sold. £76,000 is the actual revenue (4,000 × £19), not a variance.

Answer: C. Cheaper, lower-quality material gives a favourable materials price variance but is often harder to work with, so more labour time is needed, producing an adverse labour efficiency variance — a classic interrelationship between variances. Paying a higher wage rate would affect the labour rate variance, not efficiency. Sales volume and inventory levels do not explain this particular pairing. Variances should be interpreted together, not in isolation.

Answer: D. Over-absorption means more overhead was charged to production than was actually incurred, so the excess is credited to the income statement, increasing profit. Under-absorption is the reverse — debited to the income statement, reducing profit. Over- or under-absorbed overhead is not held in inventory or ignored; it is taken to the income statement in the period in which it arises, adjusting the profit for the over- or under-recovery.

Answer: A. Not-for-profit performance is commonly assessed using value for money — economy (obtaining resources at low cost), efficiency (getting the most output from resources) and effectiveness (achieving the intended objectives). Because there is no profit measure, these three Es provide a structured alternative. The other options are not the recognised framework; the value-for-money model is what the three Es refer to.

Answer: B. Average customer waiting time measures service quality in non-monetary terms and is a non-financial performance indicator, particularly important in service businesses where quality and timeliness matter. Net profit margin, return on capital employed and gross profit are all financial measures expressed in money. Good performance measurement combines financial indicators with non-financial ones such as quality, speed and customer satisfaction.

Answer: A. April receipts = 50% of April sales + 50% of March sales = (0.5 × £55,000) + (0.5 × £40,000) = £27,500 + £20,000 = £47,500. The £55,000 figure ignores the split and the timing lag. A cash budget records receipts when the cash actually arrives, so each month's cash combines part of the current month's sales with part of the previous month's, reflecting the payment pattern. £50,000 takes half of March and May sales instead of March and April.

Answer: B. Standard material cost for actual output = 1,000 units × 4 kg × £5 = £20,000. Total materials variance = standard cost − actual cost = £20,000 − £21,500 = −£1,500, i.e. £1,500 adverse, because actual cost exceeded standard. The favourable version reverses the sign. The total materials variance combines the price and usage effects and compares what the output should have cost with what it actually cost.

Answer: C. Standard labour cost for actual output = 800 units × 2 hours × £10 = £16,000. Total labour variance = standard cost − actual cost = £16,000 − £15,200 = £800 favourable, because actual cost was below standard. The adverse version reverses the sign. The total labour variance combines the rate and efficiency effects, comparing the standard cost of the output achieved with the actual labour cost incurred. £1,600 is the standard hours for the output (800 × 2), not a cost variance.

Answer: D. Efficiency variance = (standard hours for actual output − actual hours) × standard variable overhead rate = (2,000 − 2,150) × £4 = −£600, i.e. £600 adverse, because more hours than standard were taken, absorbing more variable overhead. The favourable version reverses the sign. The £150 figure omits the £4 rate. The variable overhead efficiency variance follows the labour efficiency variance, valued at the variable overhead rate per hour. £8,600 is the actual hours at the standard rate (2,150 × £4), not a variance.

Answer: A. Variable cost per unit = £30,000 ÷ 5,000 = £6. Flexed variable cost for 6,000 units = 6,000 × £6 = £36,000. Fixed cost stays at £15,000. Flexed total = £36,000 + £15,000 = £51,000. The £45,000 figure is the original unflexed budget; £54,000 wrongly flexes the fixed cost too; and £36,000 is the variable element only. Only variable costs are flexed to actual volume; fixed costs are unchanged within the relevant range.

Answer: B. Direct labour = 40 hours × £15 = £600. Overhead absorbed = 40 hours × £10 = £400. Total job cost = materials £1,200 + labour £600 + overhead £400 = £2,200. The £1,800 figure omits the overhead, and £1,200 is materials alone. Job costing accumulates the direct materials, direct labour and absorbed overhead for each individual job to arrive at its total cost. £2,600 counts the £400 overhead twice.

Answer: C. The efficiency ratio measures how productively labour time was used by expressing the actual output in standard hours as a percentage of the actual hours worked; a ratio above 100% means work was done faster than standard. It is not about comparing sales with costs, cash flows, or cost types. The ratio supports control by showing whether labour produced more or less output than the time taken would suggest at standard.

Answer: B. Budgeted sales revenue = units × selling price = 7,000 × £35 = £245,000. The sales budget is usually the starting point for the whole budgeting process, since production, materials and other budgets flow from expected sales. The other figures do not follow from multiplying the budgeted volume by the budgeted price, which is the basic revenue calculation.

Answer: C. Sales volume contribution variance = (actual units − budgeted units) × standard contribution = (3,600 − 4,000) × £15 = −£6,000, i.e. £6,000 adverse, because fewer units were sold than budgeted. The favourable version reverses the sign. The £400 figure is the volume shortfall in units, not valued. In marginal costing the volume variance is valued at standard contribution per unit, not standard profit. £54,000 is the actual sales volume at standard contribution (3,600 × £15), not a variance.

Answer: D. Buying cheaper material gives a favourable price variance, but lower-quality material is often wasted or rejected, increasing usage above standard and producing an adverse usage variance — a classic interrelationship. Higher-quality material at a higher price would give the opposite price variance. Wage rates affect labour variances, and sales volume affects sales variances, neither of which explains this materials pairing. Variances should be read together, not in isolation.

Answer: A. Variable cost per unit = £40,000 ÷ 2,000 = £20. Flexed variable cost for 2,500 units = 2,500 × £20 = £50,000, plus fixed cost £10,000 = flexed total £60,000. Variance = £60,000 − £62,000 = £2,000 adverse, because actual cost exceeded the flexed allowance. The £12,000 adverse figure wrongly compares actual cost with the unflexed original budget of £50,000, which is not a fair comparison at the higher output. A £2,000 favourable variance has the right size but the wrong direction: actual cost exceeded the flexed budget.

Answer: B. Gross wages are first collected in the wages control account (debited), and are then analysed and transferred out to work in progress (direct labour) and to overhead (indirect labour). They are not debited to payables, which is a liability, nor to sales, and they are not taken straight to the income statement. The control account acts as a gathering point before the labour cost is charged to production and overhead.

Answer: C. Cost per unit in batch costing = total batch cost ÷ number of units = £4,500 ÷ 250 = £18.00. The £0.056 figure inverts the calculation (units relative to cost). Batch costing accumulates the costs of producing a batch of identical items and then spreads them evenly across the units in the batch to give a cost per unit, which is used for valuation and pricing. £20.00 does not follow from the batch figures.

Answer: D. The capacity ratio measures how much of the budgeted capacity was used by expressing the actual hours worked as a percentage of the budgeted hours. It is distinct from the efficiency ratio (actual output in standard hours against actual hours) and the activity ratio (output in standard hours against budgeted hours). It is not about comparing sales, contribution or cost types. The capacity ratio focuses on hours worked relative to plan.