Analyse the limitations to ADP of using budgets and variance analysis when deciding the future of factory Q. Refer to Appendix 1 in your answer.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2017). The mark or mark type is shown in brackets.

1. Knowledge: Budget.
2. Knowledge: Variance analysis – comparison of budget with actual.
3. Knowledge: Limitations of budgets: Focused on short term.
4. Knowledge: Limitations of budgets: May be unrealistic.
5. Knowledge: Limitations of budgets: Bias of setter.
6. Knowledge: Limitations of budgets: May not account for external changes.
7. Application (from Appendix 1): Factory Q made a loss over last 3 months according to actual data – compared to a budgeted profit. $2m loss rather than $8m profit.
8. Application (from Appendix 1): Adverse variance of $10m.
9. Application (from Appendix 1): Factory is making a positive contribution to head office overheads.
10. Application (from Appendix 1): Allocated head office overheads were $1m higher than budgeted.
11. Application (from text): Factory Q has made an adverse profit variance for the last three years.
12. Application (from text): Factory last updated in 2005 – 12 years ago. Equipment is old.
13. Analysis: Were last 3 months typical? It would help to have data for longer period.
14. Analysis: Budgets of little value if the factory managers were not involved in setting them – were these just handed down from Head Office?
15. Analysis: Factory has no control over Head Office overhead allocation – and why has this increased?
16. Analysis: Overheads would have to be covered by other factories if it is closed.
17. Analysis: Not enough data – how were head office costs allocated?
18. Analysis: How long would the factory overhead costs continue to be incurred after closure?
19. Analysis: Could supply be outsourced? Consideration of dangers of outsourcing.
20. Analysis: Could the adverse variance be the result of failure to update factory to make it more efficient. Equipment is old.
21. ARA: Any relevant consideration of factors that ADP should take into account that budgets ignore e.g. impact on reputation of ADP if factory closed and employees made redundant.