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- 10 Marks
Question
a) The Ministry of Works and Housing prepares its budget using activity volume as a base for control purposes. The Ministry’s normal level of activity is 70%. However, in 2018, the Ministry had a peculiar challenge to the extent that they operated at a 50% level of activity. Below is the budget for 2018.
| Level of activity | 60% | 70% | 80% |
|---|---|---|---|
| Income: | GH¢ | GH¢ | GH¢ |
| IGF | 337,500 | 345,300 | 353,100 |
| Expenses: | |||
| Compensation of Employees | 175,200 | 204,400 | 233,600 |
| Goods and services | 57,000 | 64,500 | 72,000 |
| Interest | 63,500 | 73,100 | 82,700 |
| Assets | 31,500 | 36,700 | 41,900 |
| Other Expenditure | 190,000 | 190,000 | 190,000 |
| Surplus/Deficit | (179,700) | (223,400) | (267,100) |
Actual Results for 2018:
| Description | GH¢ |
|---|---|
| IGF | 350,920 |
| Compensation of Employees | 129,500 |
| Goods and Services | 73,400 |
| Interest | 92,000 |
| Assets | 31,100 |
| Other Expenditure | 172,300 |
Required:
i) Prepare a flexible budget for 50% level of activity.
(7 marks)
ii) Prepare a Variance Analysis Statement for the operational year 2018.
(3 marks)
Answer
i) Flexible Budget for 50% Level of Activity
| Description | 50% Level of Activity (GH¢) |
|---|---|
| Income: | |
| IGF | (50/70) × 345,300 = 246,643 |
| Expenses: | |
| Compensation of Employees | (50/70) × 204,400 = 146,000 |
| Goods and Services | (50/70) × 64,500 = 46,071 |
| Interest | (50/70) × 73,100 = 52,214 |
| Assets | 36,700 |
| Other Expenditure | 190,000 |
| Surplus/Deficit | (218,342) |
ii) Variance Analysis for 2018
| Budget Item | Flexible Budget (50%) (GH¢) | Actual (GH¢) | Variance (GH¢) |
|---|---|---|---|
| IGF | 246,643 | 350,920 | 104,277 |
| Compensation of Employees | 146,000 | 129,500 | 16,500 |
| Goods and Services | 46,071 | 73,400 | (27,329) |
| Interest | 52,214 | 92,000 | (39,786) |
| Assets | 36,700 | 31,100 | 5,600 |
| Other Expenditure | 190,000 | 172,300 | 17,700 |
| Total | (218,342) | (147,380) | 43,962 |
The variance analysis shows the differences between the flexible budget prepared for a 50% level of activity and the actual results for 2018. The total variance indicates a favorable variance of GH¢43,962.
- Tags: Budgeting, Flexible Budget, Ministry of Works and Housing, Variance Analysis
- Level: Level 2
- Topic: Public sector fiscal planning and budgeting
- Series: MAY 2019
- Uploader: Joseph