Reference no: EM132619958

Question - Chengdu Tea Company (CTC) imports tea in bulk from China. The imported tea is manually graded into three types of tea - Classic, Superior and Premium - in the UK by qualified staff. The tea is sold in 100 gram packets to specialist outlets in the UK.

At present, CTC produces a budget on an incremental basis based on one level of activity. However, CTC's new financial director recently decided to introduce flexible budgeting since it will improve management accounting within the company. The following information was obtained for the next budget period:

The average selling price for CTC's three products will be £5 per packet of tea.

Direct material cost of each packet of tea is estimated to be £2 per packet. However, direct material costs will fall by 3% if CTC purchases more than 4,500 kilograms of tea due to quantity discounts. The quantity discounts will apply to all purchases. Note: 1 kilogram = 1,000 grams.

Direct labour costs will fall from their current level of £1 by £0.005 per packet for every 1,000 increase in production due to the impact of the learning effect. The current level of production is 40,000 packets.

The assistant accountant produced the following analysis of CTC's operating expenses:

30,000 Packets

36,000 Packets

39,000 Packets

Operating Expenses £59,000 £60,400 £60,800

Actual results for the next budget period were as follows:

Sales quantity: 48,000 packets of tea

Sales: £244,800

Material costs: £95,040

Labour costs: 45,700

Operating costs: £64,500

Required - Write a control statement that compares actual performance with a flexed budget for 48,000 packets of tea.