Flexible Budget | Budgeted Allowance Method | Problems and Solutions

 

 

Flexible Budget

Budget which is changed according to level of activities is known flexible budgeting.

It gives different budgeted cost for different level of activities.

A flexible budget is prepared after making difference classification of all the expenses.

They are fixed cost, variable cost and semi-variable cost.

 

Types of flexible budgets

Tabular method

Segregation Method

Budgeted Allowance Basis

Overhead Variance

 

Step for calculation flexible budget

Determine range of activity

Identification of cost behavior

Select the level of activity

 

 

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Budgeted Allowance Basis of Flexible Budget

Under budgeted allowance method, a straight line formula is used for flexible budget.

A budget is prepared for the expected normal level of activity and variable cost per unit of activity.

The level of activity may be in output, labour hours or machine hours.

  

Current budgets

A current budget is related to the current conditions.

It is prepared for use over a short period of time.

This budget is more useful than a basic budget, as a target it lays down will be corrected to current conditions.

 

Short-term budgets

Short-term budget is prepared for the period less than a year.

It is very useful to lower levels of management for control purposes.

Such budgets are prepared for those activities, the trend in which is difficult to foresee over longer periods.

Cash budget and material budget are examples of short-term budgets.

 

Long-term budgets

A long-term budget can be defined as a budget which is prepared for periods longer than a year.

These budgets help in business forecasting and forward planning.

Capital Expenditure Budget and Research and Development Budget are examples of long-term budgets.

 

 

Formula of budgeted allowance

BA = FC + (VCPU × Q)

y = a + bx

 

Where:         

BA (y)          = Budget allowance; total cost

FC (a)          = Fixed cost

VCPU(b)     = Variable cost per unit

Q (x)            = Quantity, output or level of activity

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

PROBLEM: 3A

The extracted data are taken from ABC Manufacturing Company:

Level of output	50,000 units	100,000 units
Total cost	$500,000	$800,000

Required: (a) Variable cost per unit from segregation; (b) Total fixed cost

(c) Estimate the budget for 40,000 units, 60,000 units and 110,000 units

[Answer: (a) $6; (b) $200,000; (c) $440,000; $560,000 and $860,000]

SOLUTION:

Variable cost per unit (VCPU) from segregation

= Difference in cost ÷ Difference in units

= ($800,000 – $300,000) ÷ (100,000 units – 50,000 units)        

= $500,000 ÷ 50,000 units

= $6

 

Total fixed cost (base 50,000 units)

= Total Cost – VCPU × Output

= $500,000 – ($6 × 50,000)

= 500,000 – 300,000

= $200,000

 

Estimated flexible budget

Budgeted allowance	= FC + (VCPU × Q)
For 40,000 units	= 200,000 + ($6 × 40,000)
	= 200,000 + 240,000
	= $440,000
For 60,000 units	= 200,000 + ($6 × 60,000)
	= 200,000 + 360,000
	= $560,000
For 110,000 units	= 200,000 + ($6 × 110,000)
	= 200,000 + 660,000
	= $860,000

 

 

 

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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

PROBLEM: 3B

The costs information of two different levels of output is given below of Jumla Apple Process Company:

Output in units	10,000 units	20,000 units
Direct material and labour	$50,000	$1,00,000
Indirect material and labour	$30,000	$50,000
Manufacturing overhead	$50,000	$90,000
Operating cost	$20,000	$20,000

Required: (1) Total variable cost per unit and fixed cost;

(2) Budgeted cost for 9,000 units, 15,000 units and 25,000 units by formula method

[Answer: Total VCPU = $11; Fixed cost = $40,000;

$139,000; $205,000 and $315,000]

SOLUTION:

Given and working note:

Segregation for semi-variable cost	= Difference in cost ÷ Difference in units
Indirect materials and labour	= ($50,000 – $30,000) ÷ (20,000 units – 10,000 units)     = $2
Manufacturing overhead	= ($90,000 – $50,000) ÷ (20,000 units – 10,000 units)     = $4

 

Calculation for 10,000 kg (based)

Activities	Cost basis	Variable cost		Fixed cost = TC – VC
		Per unit	Variable cost
Direct material and labour	Variable	5	50,000	–
Indirect material and labour	Semi-variable	2	20,000	= 30,000 – 20,000	= 10,000
Manufacturing overhead	Semi-variable	4	40,000	= 50,000 – 40,000	= 10,000
Operating cost	Fixed	–	–	20,000
		$11			$40,000

 

 

Estimated flexible budget

Budgeted allowance	= FC + (VCPU × Q)
For 9,000 units	= $40,000 + ($11 × 9,000)
	= $40,000 + $99,000
	= $139,000
For 15,000 units	= $40,000 + ($11 × 15,000)
	= $40,000 + $165,000
	= $205,000
For 25,000 units	= $40,000 + ($11 × 25,000)
	= $40,000 + $275,000
	= $315,000

 

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

PROBLEM: 3C

ABC Manufacturing Company has installed a machine with a capacity of producing 60,000 output units annually but its annual normal capacity as 50,000 units. The company’s cost structures at two different level of output are given below:

Volume of output	50,000 units	100,000 units
Total cost	$500,000	$800,000

Required: (Budgeted by using budgeted allowance) (1) Variable cost per unit;

(2) Fixed cost for the period and fixed cost per unit; (3) Budget for the production volume of 70,000 units and 110,000 units

[Answer: (1) $6; (2) $200,000 and $4; (3) $620,000 and $860,000]

SOLUTION:

Variable cost per unit (VCPU) from segregation

= Difference in cost ÷ Difference in units

= ($800,000 – $500,000) ÷ (100,000 units – 50,000 units)        

= $300,000 ÷ 50,000 units

= $6

 

Total fixed cost (base 100,000 units)

= Total Cost – VCPU × Output

= $800,000 – ($6 × 100,000)

= $800,000 – $600,000

= $200,000

 

Fixed cost per unit

= Fixed cost ÷ Normal capacity

= $200,000 ÷ 50,000 units

= $4

 

Estimated flexible budget

Budgeted allowance	= FC + (b × LA)
For 70,000 units	= $200,000 + ($6 × 70,000)
	= $200,000 + $420,000
	= $620,000
For 110,000 units	= $200,000 + ($6 × 110,000)
	= $200,000 + $660,000
	= $860,000

 

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

PROBLEM: 3D

The costs information of two different levels of output is given below:

Particulars/Output in units	1,000 units	2,000 units
Direct material and labour	$50,000	$1,00,000
Indirect material and labour	$30,000	$50,000
Manufacturing overhead	$50,000	$90,000
Opening cost	$20,000	$20,000

Required: (Budgeted by using budgeted allowance): (1) Total variable cost per unit; (2) Total fixed cost

(3) Total cost for 5,000 units; 1,500 units and 2,500 units

[Answer: (1) $110; (2) $40,000; (3) $95,000; $150,000 and $205,000]

SOLUTION:

Given and working note:

Segregation for semi-variable cost	= Difference in cost ÷ Difference in units
Indirect materials and labour	= ($50,000 – $30,000) ÷ (2,000 units – 1,000 units)          = $20
Manufacturing overhead	= ($90,000 – $50,000) ÷ (2,000 units – 1,000 units)          = $40

 

Calculation of VCPU and Fixed cost (base 1,000 units)

Cost activities	Cost basis	Variable cost		Fixed cost = Total cost – Variable cost
		VCPU	Total
Direct materials and labour	Variable	50	50,000	–
Indirect materials and labour	Semi-variable	20	20,000	= 30,000 – 20,000 =	10,000
Manufacturing overhead	Semi-variable	40	40,000	= 50,000 – 40,000 =	10,000
Operating expenses	Fixed	–	–		20,000
Total		$110			$40,000

 

Now,

Budgeted allowed	= Fixed cost + VCPU × Output
Y	=   a + bx
Cost for 500 units	= $40,000    + $110 × 500
	= $40,000    + $55,000
	= $95,000
Cost for 1,000 units	= $40,000    + $110 × 1,000
	= $40,000    + $110,000
	= $150,000
Cost for 1,000 units	= $40,000    + $110 × 1,500
	= $40,000    + $165,000
	= $205,000

 

 

 

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Problems  and  Answers  of  Flexible Budget

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

PROBLEM: 3A 

The repair and maintenance expenses of a workshop along with operating machine hours are as follows:

Machine hours	Repair and maintenance expenses ($)
150	350
250	450
350	550
450	650
550	750

Required: (a) Variable cost per machine hours; (b) Fixed cost of the workshop

(c) Estimated repair and maintenance for 475 operating machine hours by using y = a + bx

[Answer: (1) VCPU = $1; (2) Fixed cost = $200; (3) Total cost = $675]

 

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