B. FC Company Exhibit 1 below shows the budgeted and actual condensed income sta

Question

B. FC Company Exhibit 1 below shows the budgeted and actual condensed income statements for FC Company at the start and end of 20X8 budget year. The profit plan for the year (expressed in parent company GAAP) is translated to parent currency at the beginning of period exchange rate of FC 1 PC 1. The foreign currency devalues by 20 percent by year-end. The company employs the FIFO costing method. Unit production costs dropped from a planned FC3.60 to FC3.00 per unit. Actual sales increased by 300 units from 1000 to 1300 units during the year at a price of FC5.00, FC1.00 lower than that expected. A performance report submitted to the parent company PC Company, breaking out price-, volume- and exchange-rate-induced variances appears in Exhibit 2

Explanation / Answer

(1).

Now first of all let’s see the performance report of FC company.

As we see that actual net operating income is 700 whereas budgeted net income was 600 so on the basis of actual net inocome we can say that overall performance of FC company is good because it generated more income in compare to budgeted net operating income.

Main reason for higher net income is lower amount of cost of goods sold, because revenues is increased by 500 in compare to budgeted but cost of goods sold is increased by 300 in compare to budgeted cost of goods sold that is why we can say this cost efficiency has resulted into higher net operating income.

Although actual operating expenses and actual interest payment is more than budgeted but in compare to increase in revenues an increase in actual operating expenses and actual interest payment is lower that is why it led to positive increase in net income for FC company.

Now let’s see impact of change in exchange rate. As we know that due to decrease of 20% in exchange rate, total net income is below than budgeted by 520. Thus it is clear that fall in exchanage rate will affect the overall profitability of FC company. So if this company manage its’ fluctuations in the exchange rates then overall profitability will be very good.

Thus on the basis of above explanation, it is clear that overall performance of this company is good.

(2).

                                                                                                        Date………..

CEO,

PC company

Subject: “ Variance analysis report for FC company.”

Respected CEO of PC company,

I want to draw your attention towards the variances analysis of FC company. As we have seen that FC company has good overall actual revenues in compare to budgeted revenues.

Apart from this FC company also managed its cost efficiently, thus as a result actual net operating income is more positive in compare to budgeted. But as per information of the question it is clear that by the end of year foreign currency is devalued by 20% and such devaluation lead to negative impact on the operating income.

So I want to say that management should look into this matter and take required corrective actions so that such fluctuations in the exchange rates can be managed efficiently. And due to proper management we can manage negative impact on the operating income.

As we know that there are several types of options available in the market to manage currency related risks, so it is suggested to take benefits of such instruments so that currency related risks can be minimised.

Finally I will say that management need to look into this matter.

Thanks & Regards

Independent Director

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