Flexible Budget¶

Question 1Question 2Question 3Question 4Question 5

Question¶

Prepare a flexible budget for overheads based on the following data, and ascertain the overhead rates at 50% and 60% capacity levels:

Variable Overheads:
Material: Rs 5,000 at 50% capacity and Rs 6,000 at 60% capacity.
Labour: Rs 15,000 at 50% capacity and Rs 18,000 at 60% capacity.
Semi-variable Overheads:
Electricity: 40% fixed and 60% variable.
Repairs: 80% fixed and 20% variable.
Fixed Overheads:
Depreciation: Rs 16,500
Insurance: Rs 4,500
Salaries: Rs 15,000

Answer¶

Category	Description	50% Capacity (Rs)	60% Capacity (Rs)
Variable Overheads	Material	5,000	6,000
	Labour	15,000	18,000
Semi-variable Overheads	Electricity (40% Fixed, 60% Variable)	12,600	13,680
	Repairs (80% Fixed, 20% Variable)	2,700	2,760
Fixed Overheads	Depreciation	16,500	16,500
	Insurance	4,500	4,500
	Salaries	15,000	15,000
Total Overheads		71,300	76,440
Estimated Direct Labour Hours		155,000	186,000
Overhead Rate (Total Overheads / Direct Labour Hours)		0.46	0.41

Working Notes¶

Electricity: At 50% capacity, fixed part is Rs (18,000 * 40% = 7,200) and the variable part is Rs (18,000 * 60% * 50% = 5,400). Total is Rs (7,200 + 5,400 = 12,600). At 60% capacity, fixed part remains Rs 7,200 and variable part increases to Rs (18,000 * 60% * 60% = 6,480), totaling Rs (7,200 + 6,480 = 13,680).
Repairs: At 50% capacity, fixed part is Rs (3,000 * 80% = 2,400) and the variable part is Rs (3,000 * 20% * 50% = 300). Total is Rs (2,400 + 300 = 2,700). At 60% capacity, fixed part remains Rs 2,400 and variable part increases to Rs (3,000 * 20% * 60% = 360), totaling Rs (2,400 + 360 = 2,760).

Question¶

Prepare a flexible budget for overheads based on the following data and ascertain the overhead rates at 60% and 70% capacity:

Variable Overheads:
Material: Rs 6,000 at 60% capacity and Rs 7,000 at 70% capacity.
Labour: Rs 18,000 at 60% capacity and Rs 21,000 at 70% capacity.
Semi-variable Overheads:
Electricity: 40% fixed and 60% variable.
Repairs: 80% fixed and 20% variable.
Fixed Overheads:
Depreciation: Rs 16,500
Insurance: Rs 4,500
Salaries: Rs 15,000

Flexible Budget for Overheads at 60% and 70% Capacity Levels¶

Category	Description	60% Capacity (Rs)	70% Capacity (Rs)
Variable Overheads	Material	6,000	7,000
	Labour	18,000	21,000
Semi-variable Overheads	Electricity (40% Fixed, 60% Variable)	30,000	33,000
	Repairs (80% Fixed, 20% Variable)	2,760	2,820
Fixed Overheads	Depreciation	16,500	16,500
	Insurance	4,500	4,500
	Salaries	15,000	15,000
Total Overheads		93,260	100,320
Estimated Direct Labour Hours		186,000	217,000
Overhead Rate (Total Overheads / Direct Labour Hours)		0.50	0.46

Working Notes¶

Electricity:
At 60% capacity, the fixed part is Rs (30,000 * 40% = 12,000) and the variable part is Rs (30,000 * 60% = 18,000). Total is Rs (12,000 + 18,000 = 30,000).
At 70% capacity, the fixed part remains Rs 12,000 and the variable part is Rs (18,000/60 * 70 = 21,000), totaling Rs (12,000 + 21,000 = 33,000).
Repairs:
At 60% capacity, fixed part is Rs (3,000 * 80% = 2,400) and the variable part is Rs (3,000 * 20% * 60% = 360). Total is Rs (2,400 + 360 = 2,760).
At 70% capacity, fixed part remains Rs 2,400 and variable part increases to Rs (3,000 * 20% * 70% = 420), totaling Rs (2,400 + 420 = 2,820).

Question¶

Prepare a flexible budget for a factory's production of 600 units and 800 units, given the expenses budgeted for 1,000 units are as follows:

Material Cost per unit: Rs. 700
Labour Cost per unit: Rs. 250
Variable overheads per unit: Rs. 200
Selling expenses per unit: Rs. 130 (20% fixed)
Administrative expenses: Rs. 200,000 (fixed)

Working Notes¶

Material, Labour, and Variable Overheads scale directly with the number of units produced.
Selling Expenses are semi-variable:
Fixed component: 20% of Rs. 130 = Rs. 26 per unit
Variable component: 80% of Rs. 130 = Rs. 104 per unit
Administrative Expenses remain constant at all production levels as they are fixed.

Calculations¶

For 600 Units:
Materials: Rs. 700 x 600 = Rs. 420,000
Labour: Rs. 250 x 600 = Rs. 150,000
Variable overheads: Rs. 200 x 600 = Rs. 120,000
Variable selling expenses: Rs. 104 x 600 = Rs. 62,400
Fixed selling expenses: Rs. 26 x 600 = Rs. 15,600
Total cost = Sum of above + fixed administrative expenses
For 800 Units:
Materials: Rs. 700 x 800 = Rs. 560,000
Labour: Rs. 250 x 800 = Rs. 200,000
Variable overheads: Rs. 200 x 800 = Rs. 160,000
Variable selling expenses: Rs. 104 x 800 = Rs. 83,200
Fixed selling expenses: Rs. 26 x 800 = Rs. 20,800
Total cost = Sum of above + fixed administrative expenses

Solution¶

Particulars	Per Unit Rs.	Total Rs. (600 Units)	Per Unit Rs.	Total Rs. (800 Units)
Variable Cost:
Materials	700	420,000	700	560,000
Labour	250	150,000	250	200,000
Variable Overheads	200	120,000	200	160,000
Semi-variable Cost:
Variable Selling Expenses	104	62,400	104	83,200
Fixed Selling Expenses	26	15,600	26	20,800
Fixed Cost:
Administrative Expenses	333.33	200,000	250	200,000
Total Cost (A+B+C)	1,630.66	978,000	1,536.50	1,224,000

Explanation¶

This flexible budget adjusts the cost structure for different levels of production (600 and 800 units). Each component of the costs is scaled accordingly:

Variable Costs (materials, labour, and variable overheads) increase linearly with the number of units.
Semi-variable Costs for selling expenses are split into fixed and variable parts, calculated per unit.
Fixed Costs, such as administrative expenses, remain unchanged regardless of the number of units produced, showing the impact of fixed costs on the total budget as the production volume changes.

This budget aids in planning and cost management for varying production levels, demonstrating how total costs and per unit costs fluctuate with changes in the production scale.

Question¶

The task is to prepare a flexible budget for production levels of 50% and 75% capacity based on the budgeted output at 100% capacity (6,400 units) with total costs amounting to Rs. 1,76,048. This will include the effect of maintaining the selling price per unit at Rs. 40 on net profit. The budget will also account for unchanged administrative, selling, and distribution expenses totaling Rs. 3,600.

Existing Budget Details at 100% Capacity (6,400 units):¶

Fixed Costs: Rs. 20,688
Variable Costs:
Power: Rs. 1,440
Repairs: Rs. 1,700
Miscellaneous: Rs. 540
Direct Material: Rs. 49,280
Direct Labour: Rs. 102,400
Total Variable Costs: Rs. 155,360
Total Costs: Rs. 176,048
Sales Revenue: Rs. 256,000 (6,400 units * Rs. 40 per unit)
Net Profit: Calculated as Sales - Total Costs - Administrative, Selling, and Distribution Expenses

Flexible Budget at 50% and 75% Capacities:¶

Sales and Cost Calculation:¶

Sales Revenue per Unit: Rs. 40
Administrative, Selling, and Distribution Costs: Rs. 3,600 (constant at all levels)

Variable Costs Adjustment:¶

Variable costs scale linearly with production volume: - At 50% Capacity (3,200 units) - At 75% Capacity (4,800 units)

Solution¶

Particulars	100% Capacity (6,400 Units)	75% Capacity (4,800 Units)	50% Capacity (3,200 Units)
Sales Revenue (Rs. 40/unit)	256,000	192,000	128,000
Cost of Sales:
Direct Material	49,280	36,960	24,640
Direct Labour	102,400	76,800	51,200
Power	1,440	1,080	720
Repairs	1,700	1,275	850
Miscellaneous	540	405	270
Total Variable Costs	155,360	116,520	77,680
Fixed Costs	20,688	20,688	20,688
Total Costs	176,048	137,208	98,368
Gross Profit	79,952	54,792	29,632
Less: Adm., Selling, and Dist. Costs	3,600	3,600	3,600
Net Profit	76,352	51,192	26,032

Explanation¶

The budget adjusts the variable costs (direct material, direct labour, power, repairs, and miscellaneous) according to the production level.
Fixed costs (administrative, selling, and distribution expenses) remain constant across different production levels.
The net profit is derived after subtracting total costs (including fixed costs and variable costs) and administrative, selling, and distribution expenses from the sales revenue.
As production capacity decreases, both sales revenue and variable costs decrease, but fixed costs remain constant, impacting the net profit.

Question¶

Current Situation at 40% Capacity¶

Production: 10,000 buckets/month
Materials: Rs. 10 per bucket
Labour: Rs. 3 per bucket
Overheads: Rs. 5 per bucket (60% fixed, i.e., Rs. 3 fixed and Rs. 2 variable)
Selling Price: Rs. 20 per bucket

Adjusted Scenarios¶

50% Capacity:
Selling price falls by 3% (Rs. 20 - 3% = Rs. 19.40)
90% Capacity:
Selling price falls by 5% (Rs. 20 - 5% = Rs. 19.00)
Material cost falls by 5% (Rs. 10 - 5% = Rs. 9.50)

Production at Different Capacities¶

50% Capacity: \(12,500\) buckets/month
90% Capacity: \(22,500\) buckets/month

Answer¶

Particulars	40% Capacity	50% Capacity	90% Capacity
Production and Sales Units	10,000	12,500	22,500
Sales Price per Unit (Rs.)	20	19.40	19.00
Sales Amount (Rs.)	2,00,000	2,42,500	4,27,500
Marginal Cost:
- Material (Rs.)	10	10	9.50
- Labour (Rs.)	3	3	3
- Variable Overhead (Rs.)	2	2	2
Total Variable Cost (Rs.)	1,50,000	1,87,500	3,26,250
Contribution (Rs.)	50,000	55,000	1,01,250
Fixed Costs (Rs.)	30,000	30,000	30,000
Profit (Rs.)	20,000	25,000	71,250
Contribution per Unit (Rs.)	5	4.40	4.50
Break-even Point (Units)	6,000	6,818	6,667

Notes¶

Contribution per Unit is calculated as (Sales Price per Unit - Total Variable Cost per Unit).
Profit is derived by subtracting fixed costs from the contribution.
Break-even Point (Units) is calculated as \( \frac{\text{Fixed Costs}}{\text{Contribution per Unit}} \).

Explanation¶

The budget shows an increase in both production and sales as capacity utilization rises from 40% to 90%.
A decrease in material costs and selling price at 90% capacity, along with increased production, leads to a higher profit despite a slight decrease in the contribution per unit.
Break-even points slightly increase from 6,000 units at 40% capacity to 6,818 at 50% capacity, then decrease slightly at 90% capacity due to a more efficient contribution margin.

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