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Table 3.9.7 An update on Ko Samui Ltd’s budget

Budgeted figures $000s Actual figures $000s

Income
Sales revenue 32,250 31,500
Other income 0 35
Total income 32,250 X

Expenses
Materials 12,900 12,700
Wages and salaries 7,095 7,015
Research and development 2,500 2,500
Rent 550 550
Marketing and distribution 3,500 3,750
Fuel and other costs 4,150 4,200
Total expenses 30,695 Y

Net income (or profit) 1,555 Z

Questions
1 Complete Ko Samui Ltd’s budget by filling in the missing figures shown by the
letters X, Y and Z. [3]
2 Calculate the variance for Ko Samui Ltd’s sales revenue in Table 3.9.7. [2]
3 Explain one reason why the managers at Ko Samui Ltd would be pleased with the
business’s financial performance and one reason why they might not be pleased. [4]

Top tip!
When answering questions on variances it is important for you to identify those areas in which
major differences between planned and actual income or expenses have occurred. This will help to
give a focus to your answer and help you to concentrate on the most important factors.

CASE STUDY

BMW’s new factory in Mexico

In 2019, the German car manufacturer BMW opened a new car factory in San Luis Potosí
in Mexico. The factory will build BMW’s most successful model series: the BMW 3 Series
Sedan. This popular car has set the standards for performance, efficiency and design and
the company expects high sales of its new model. The new model does, however, face
intense competition from the Audi 4 and Mercedes C-Class and others.
BMW has invested more than $1 billion in its new factory in which robots and employees
work directly alongside one another. Production began in April 2019, with the plant
producing 25,000 cars by the end of the year. In 2020 the factory manufactured 55,000
cars and it has budgeted for a figure of 70,000 vehicles for 2021.

Questions
1 Distinguish between an adverse and a favourable variance. [4]
2 Explain two possible factors that might result in BMW’s factory recording adverse
variances on its budgets. [6]

3.9 Budgets (HL only) 371