12 markseasy
(a)
Define the term ‘zero budgeting’.
Business — A-Level
18 questions · 89 marks · ≈ 1 hours
Define the term ‘zero budgeting’.
Extract:
Dayo's Bakery (DB)
Dayo started a bakery business five years ago in country W. She uses batch production to make a range of breads, pastries and cakes, which she sells to local restaurants and retail outlets. DB now employs 18 workers. Skilled bakers are difficult to find in country W, as many have moved to work for larger food manufacturers in the capital city. Dayo uses on-the-job training to develop new employees, but this takes time and has increased costs.
Dayo has set a mission to 'provide high-quality, locally sourced baked goods to the communities of country W'. She plans to open a third bakery location by the end of the year.
DB does not have enough working capital to open the third location without additional finance. Two options are available:
Table 1.1 shows DB's budgeted and actual financial data for the six months ended March 2024.
Table 1.1 DB budgeted and actual financial data (six months ended March 2024)
| Budget ($) | Actual ($) | Variance ($) | |
|---|---|---|---|
| Revenue | 120 000 | 105 000 | |
| Labour costs | 42 000 | 52 000 | |
| Raw material costs | 36 000 | 33 000 | |
| Fixed overheads | 18 000 | 18 000 | 0 |
| Total costs | 96 000 | 103 000 | |
| Profit | 24 000 | 2 000 |
[case-study] Dayo's Bakery (DB)
Dayo started a bakery business five years ago in country W. She uses batch production to make a range of breads, pastries and cakes, which she sells to local restaurants and retail outlets. DB now employs 18 workers. Skilled bakers are difficult to find in country W, as many have moved to work for larger food manufacturers in the capital city. Dayo uses on-the-job training to develop new employees, but this takes time and has increased costs.
Dayo has set a mission to 'provide high-quality, locally sourced baked goods to the communities of country W'. She plans to open a third bakery location by the end of the year.
DB does not have enough working capital to open the third location without additional finance. Two options are available:
- Option A: A bank loan of $80 000 at an annual interest rate of 8%
- Option B: A business partner, Kofi, who would invest $80 000 in return for a 30% share of DB's annual profits
Table 1.1 shows DB's budgeted and actual financial data for the six months ended March 2024.
Table 1.1 DB budgeted and actual financial data (six months ended March 2024)
Budget ($) Actual ($) Variance ($) Revenue 120 000 105 000 Labour costs 42 000 52 000 Raw material costs 36 000 33 000 Fixed overheads 18 000 18 000 0 Total costs 96 000 103 000 Profit 24 000 2 000
Explain the term budget.
Explain one benefit to a business of using budgets.
Define the term 'incremental budget'.
Define the term 'flexible budget'.
Define the term 'adverse variance'.
Explain one benefit to a business of using a flexible budget rather than a fixed budget.
Explain why a favourable variance is not always good news for a business.
Explain one drawback to a business of using budgets.
Explain one way in which budgets can help a business to allocate its resources.
Extract:
Normax Hotels (NH)
NH is a public limited company that owns 32 hotels in country X. Jolin is the Chief Executive. NH has a centralised organisational structure. NH has three types of hotel: • Luxury hotels offer high quality accommodation at premium prices in city centres and exclusive beach resorts. They attract guests from all over the world as well as high‑income earners in country X. • Family hotels offer family rooms, children’s play areas, babysitting services and activities for children in rural and seaside locations. • Basic hotels offer clean, simple accommodation with basic food and facilities. The guests are low‑income travellers and students. They are located in city retail parks. Each hotel manager has limited authority to make decisions because they are told what to do by NH’s Head Office. NH is organised into the following functional departments: administration, operations, finance, marketing, human resources, IT and strategic planning. International expansion? Country Q is a low‑income country. It has a small but growing number of locally owned hotels. Jolin has held two meetings with the Minister for Tourism in country Q to discuss the possibility of opening three NH hotels in her country. These would be located in areas of outstanding natural beauty. Jolin told her that the three hotels would employ several hundred people and generate significant profits. However, the Minister expressed concern that country Q could lose more than it gained from such an investment from a large foreign company. She would have to consider the proposal in more detail. Operations issues Jolin is concerned that profits have recently decreased. He monitors key statistics and is considering introducing lean production principles. Table 1 shows some relevant information. NH holds high levels of inventory of supplies needed for the rooms. Each hotel can supply enough sheets, towels, soaps and cosmetics to every room every day, whether needed or not. The kitchens are expected to have enough food inventory for three days. A small but increasing number of employees have been dismissed for taking home food from the kitchen stores.
Table 1: NH capacity utilisation (room occupancy) and price data, 2019 Hotel type Total number of rooms Budgeted average number of rooms occupied per night Average number of rooms actually occupied per night Price per room per night Luxury 1600 1400 1300 $150 Family 1400 1100 1000 $110 Basic 2000 1800 1600 $40 Customer service Hotel managers claim that they follow company policy and insist that employees do the same. However, many customers complain about the difficulty of communicating with employees and managers who often claim that they are ‘too busy’. Another common complaint is that the hotels need modernising. Head Office has received some letters from employees with ideas for improvements but these have not been considered. Table 2 shows information about NH customers’ experience. Table 2: NH customers’ experience Hotel type Customer complaints 2019 Percentage change of customer complaints from 2018 Average customer satisfaction rating out of 10 Luxury 8560 +8 8.3 Family 6800 +7 7.1 Basic 9040 +9 8.1 Human resource issues Hotel employees are recruited by each hotel manager. Many employees have part time, flexible and temporary contracts. None of them are on zero hour contracts. All employees are trained to perform only one role in the hotel. The hotel managers are given strict labour cost budgets. Each manager has assistant managers who decide the allocation of tasks. Employees have worksheets that detail each task and how long it should take. No time is allowed to discuss these details. The Human Resource Director has just returned from a conference about Management by Objectives (MBO) and is now considering the information in Table 3.
Table 3: NH employee information 2018 2019 Employment costs as a percentage of total costs 68% 74% Employees average hourly wage rate $8 $8 Trade union membership as a percentage of employees 14% 18% Percentage of employees involved in disciplinary proceedings 3% 6% Labour turnover: non‑management employees 14% 26% Labour turnover: assistant managers 4% 15% Average job satisfaction rating out of 10: non‑management employees 6 5 Average job satisfaction rating out of 10: assistant managers 9 8 Marketing NH hotels Jolin is worried about room occupancy rates being below budget. Katie, the Marketing Director, told Jolin that: • the balance between the advertising media used (magazines, television and direct marketing) needed to be reviewed • economic and market conditions have not been favourable • room prices are fixed at the start of each year. Jolin insisted that Katie should revise the marketing plan to achieve the objectives of increased occupancy rates and increased revenue. A possible takeover Pitro, the Finance Director, has prepared the latest financial statements. See Table 4 and Table 5. Jolin recently told him: ‘I have been approached by the owners of EatBest, a restaurant chain, who want to sell the business. If NH takes over EatBest it could be completed in 2021. It would involve making a cash payment of $20m plus 0.5m NH shares. EatBest’s restaurants are valued at $40m.’ Jolin has forecast that this takeover would result in the following changes to NH’s accounts for the year ending 31 October 2021: • revenue would increase to $170m, cost of sales would increase to $46m and expenses would increase to $109m • additional borrowing of $50m at 5% interest per year • current assets and current liabilities increase by 10%.
Table 4: NH income statement year ended 31 October 2020 $m Revenue 140 Cost of sales 36 Gross profit 104 Expenses 84 Operating profit 20 Interest 4 Profit before tax 16 Profit after tax 8 Dividends 5 Retained earnings 3 Table 5: Extract from NH statement of financial position at 31 October 2020 $m Non‑current assets 80 Current assets 35 Total assets 115 Non‑current liabilities (60) Current liabilities (20) Total liabilities (80) Net assets 35 Directors’ meeting Jolin has just had a meeting with the directors. He started by reminding them that NH is recognised as having three core competencies which must provide the framework for any strategic decisions made. These are: • outstanding customer service • professional standards that focus on efficiency • clear leadership based on understanding the industryThe directors discussed whether the organisational structure of NH should be changed. Jolin told the directors: ‘I am convinced that we need to change the organisational structure of NH. When the company started with just one hotel it was obvious that functional organisation was best. Now I think this is a barrier to success. Perhaps we should consider management theory including Chandler’s assertion that strategy and structure are linked. Maybe we also need to consider delayering NH’s organisational structure.’ Jolin finished the meeting by telling directors: ‘We also need a new strategy to avoid decline. We have to review our objectives and structure as part of producing a detailed strategic plan for success.’
Read the following extract (Table 1) before answering
Calculate for 2019 the variance in total sales revenue per night for NH’s basic hotels.
[case-study] Dayo's Bakery (DB)
Dayo started a bakery business five years ago in country W. She uses batch production to make a range of breads, pastries and cakes, which she sells to local restaurants and retail outlets. DB now employs 18 workers. Skilled bakers are difficult to find in country W, as many have moved to work for larger food manufacturers in the capital city. Dayo uses on-the-job training to develop new employees, but this takes time and has increased costs.
Dayo has set a mission to 'provide high-quality, locally sourced baked goods to the communities of country W'. She plans to open a third bakery location by the end of the year.
DB does not have enough working capital to open the third location without additional finance. Two options are available:
- Option A: A bank loan of $80 000 at an annual interest rate of 8%
- Option B: A business partner, Kofi, who would invest $80 000 in return for a 30% share of DB's annual profits
Table 1.1 shows DB's budgeted and actual financial data for the six months ended March 2024.
Table 1.1 DB budgeted and actual financial data (six months ended March 2024)
Budget ($) Actual ($) Variance ($) Revenue 120 000 105 000 Labour costs 42 000 52 000 Raw material costs 36 000 33 000 Fixed overheads 18 000 18 000 0 Total costs 96 000 103 000 Profit 24 000 2 000
Calculate the variance in revenue and the variance in labour costs for DB.
[case-study] Denby
Denby makes cardboard boxes for food producers in country J. Its budget for the year was prepared on the assumption that it would produce 40 000 boxes.
Demand was stronger than expected and Denby actually produced 46 000 boxes.
Table 1.1 shows Denby's budgeted and actual figures for the year.
Table 1.1 Denby budgeted and actual figures
Budget Actual Output (boxes) 40 000 46 000 Variable production costs ($) 128 000 151 800 Fixed costs ($) 50 000 50 000 The finance director wants the budget flexed to the actual level of output before any variance is reported.
Calculate Denby's flexed budget for variable production costs and the resulting variance.
[case-study] Merrick Laundry
Merrick Laundry washes and presses bed linen and towels for hotels in country R. It employs 140 people.
Merrick has used incremental budgeting for nine years. Each department's budget is the previous year's figure increased in line with inflation.
The marketing budget still includes $18 000 a year for advertising in printed hotel directories, although 84% of new customers now arrive through an online booking platform. The maintenance budget has not risen in real terms since 2019, and machine breakdowns rose from 14 to 31 last year.
Rashida, the finance director, wants Merrick to move to zero budgeting. The operations manager has warned that departmental managers are already stretched.
Analyse two benefits to Merrick Laundry of introducing zero budgeting.
[case-study] Tavener Roofing
Tavener Roofing installs roofs on new houses in country M. It sets budgets each quarter and reviews variances at the end of each one.
Tavener changed its roof tile supplier at the start of the quarter to one charging 15% less. Since then 1 in 9 roofs has needed tiles replaced after installation, and teams have spent time returning to completed jobs.
Table 1.1 shows Tavener's variances for the quarter ended June 2026.
Table 1.1 Tavener Roofing variances, quarter ended June 2026
Variance ($) Revenue 12 000 adverse Materials 9 000 favourable Labour 15 000 adverse
Analyse two ways in which variance analysis could help Tavener Roofing to improve its performance.
[case-study] Draycott
Draycott supplies and services commercial kitchen equipment for restaurants and hotels in country F. Nadia founded the business alone and it now employs 54 people across four departments.
Two years ago Draycott nearly closed. Spending on new vans went ahead without any check while a large customer delayed payment, and Nadia had to sell equipment to meet the wage bill. She introduced departmental budgets shortly afterwards.
Nadia is now unsure they are worth keeping. Each of the four managers spends around three days a quarter preparing budget submissions. Last year two departments underspent by $22 000 and $14 000, which Nadia believes shows they asked for more than they needed. Revenue is growing at about 30% a year, so figures agreed in January are often out of date by June.
Her accountant has suggested replacing budgets with a monthly review of management accounts.
Evaluate whether Draycott should stop using budgets.
[case-study] Brayford Events
Brayford Events hires out marquees and staging for weddings and festivals in country T. Demand is highly seasonal, with 62% of annual revenue earned in four months.
Brayford sets one fixed budget each year. Last year's was built on 480 bookings; the business actually took 611. Every cost centre reported an adverse variance, and managers argued the figures told them nothing they could use.
Priya, the operations director, wants Brayford to move to flexible budgets so costs are compared at the level of bookings actually achieved.
Sam, the finance manager, is not convinced. Brayford's marquee crew of 26 are on annual salaries and are paid whether or not there is work, while transport and casual labour rise with each booking. Some costs, such as vehicle servicing, are partly fixed and partly variable. Brayford employs one part-time accountant, who already works two days a week.
Evaluate whether Brayford Events should replace its fixed budget with a flexible budget.
[case-study] Penhale
Penhale operates 22 hardware stores in country B. Head office sets each store's quarterly budget by taking the previous year's figures and adding 4%. Store managers receive a bonus if they meet their budget.
Store 7 is in a town that lost its bus route in February, and footfall fell by 19%. Its manager, Ilene, kept all staff on so customers were still served quickly. Store 14's manager met the budget by cutting staff hours.
Table 1.1 shows results for the two stores last quarter.
Table 1.1 Penhale results, quarter ended June 2026
Store 7 Store 14 Labour cost variance ($) 31 000 adverse 12 000 favourable Customer complaints 11 47 Employees leaving 0 2 Complaints at Store 14 rose from 9 to 47 in one quarter, and the two employees who left had each worked there for over ten years.
Marek, the finance director, argues that variances are the only fair way to compare 22 managers, because every store is measured in the same way.
Evaluate the usefulness of budget variances to Penhale in measuring the performance of its store managers.