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.
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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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.
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 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.
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.
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 |
#####
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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