Flexible Budget | Segregation Method | FC | VC | SVC | Problems and Solutions
Arjun EP
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.
Methods of flexible budget
Tabular method
Segregation method
Budgeted allowance basis
Overhead variance method
Step for calculation flexible budget
Determine range of activity
Identification of cost behavior
Select the level of activity
Segregation Method | Cost Segregation from Mixed Cost
Segregation means separation, isolation or to make separate.
Semi-variable cost can be separated into two parts; they are fixed cost and variable cost.
The division of cost into fixed cost and variable cost is known as segregation of cost.
There are many methods to find out separation semi-variable cost into fixed cost and variable cost.
Out of them, following are very popular methods:
High-low method
Least square method
(A) High-low method
Under this method, semi-variable cost is segregated into fixed and variable components using two data points.
This method assumes that fixed cost remain constants.
If there is any change, that is variable cost.
Working notes for segregation:
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Step, 1 |
finds out semi-variable cost |
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Step, 2 |
select the highest and the lowest amount or cost |
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Step, 3 |
select the highest and the lowest units |
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Step, 4 |
separate variable cost per unit (VCPU) |
= Difference in cost ÷ Difference in units |
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Or |
= (High cost – Low cost) ÷ (High units – Low units) |
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Step, 5 |
calculate total variable cost |
= Base units × VCPU |
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Step, 6 |
calculate fixed cost |
= Total Cost – VCPU × Output |
(B) Least square method
It is the method of fitting curve to data.
A method, finding best curve to fit a set of statistical data point is least square.
It is the statistical methods to separate fixed cost and variable cost from semi-variable cost.
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Step 1, Assume ‘x’ for output, production level or activity level and sum of ‘x’ as Σx |
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Step 2, Assume ‘y’ for variable cost and sum of ‘y’ as Σy |
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Step 3, Multiply of ‘x and y’ and sum of ‘x and y’ as Σxy |
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Step 4, Convert x into x2 and sum of ‘x2’ as Σx2 |
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Step 5, Find out variable cost per unit by using formula (b) = (NΣxy – Σx·Σxy) ÷ NΣx2 – (Σx)2 |
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Step 6, Find fixed cost by using formula (a) |
= (Σx2·Σy – Σx·Σxy) ÷ ΣNx2 – (Σx)2 |
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Or |
= Σy – b(Σx) ÷ N |
Where:
N is number of items or observation
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Classification of Cost | Fixed Cost | Variable Cost | Semi-variable Cost
They are three types of costs in cost accounting; they are fixed cost, variable cost and semi-variable cost.
Fixed cost
It is also called capacity cost, periodic cost and burden cost.
These expenses are not changed according to output.
This level is prefixed.
Fixed cost never be a zero.
Generally, it is an uncontrollable and unavoidable cost.
Some fixed costs are:
Rent
Depreciation
Salary for permanent staff
Taxes
Insurance etc
Note: There is inverse or opposite rule for total fixed cost and fixed cost per unit.
Variable cost
It is also called changeable cost, direct cost and running cost.
It is affected according to output or production.
There is a close relationship between total variable cost and volume of output.
When the output is zero, the total variable cost is also zero but the variable cost per unit never is zero.
Semi variable cost (mixed cost or semi-fixed cost)
It is the mixed of fixed cost and variable cost.
Neither total amount nor per unit cost of semi-variable cost remains constant.
If the levels of production increase, total semi-variable cost decrease but never be zero and vice versa.
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2A
JT Flour Mill makes different products from wheat. Following data are related to suji (semolina) for one month production:
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Particulars /Output in kg |
15,000 kg |
20,000 kg |
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Direct materials |
225,000 |
300,000 |
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Direct labour |
75,000 |
100,000 |
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Direct expenses |
45,000 |
60,000 |
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Depreciation |
20,000 |
20,000 |
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Repairs and maintenance |
16,000 |
20,000 |
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Power and heating |
7,500 |
9,000 |
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Required: Flexible budget for 10,000 kg and 25,000 kg (a) Total fixed cost; (b) Total cost
[Answer: (a) $27,000; (b) $268,000 and $629,500]
SOLUTION:
Given and working note:
Calculation for 15,000 kg (based)
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Activities |
Cost basis |
Variable cost |
Fixed Cost = TC – VC |
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Per unit |
Variable cost |
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Direct materials |
Variable |
15 |
225,000 |
– |
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Direct labour |
Variable |
5 |
75000 |
– |
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Direct expenses |
Variable |
3 |
45000 |
– |
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Depreciation |
Fixed |
– |
– |
20,000 |
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Repairs and maintenance |
Semi-variable |
0.8 |
12,000 |
16,000 – 12,000 |
= 4,000 |
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Power and heating |
Semi-variable |
0.3 |
4,500 |
7,500 – 4,500 |
= 3,000 |
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Segregation for semi-variable cost |
= Difference in cost ÷ Difference in units |
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Repairs and maintenance |
= ($16,000 – $20,000) ÷ (20,000 units – 15,000 units) |
= $0.8 |
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Power and heating |
= ($9,000 – $7,500) ÷ (20,000 units – 15,000 units) |
= $0.3 |
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Flexible Budget
JT Flour Mill
|
Particulars |
Level of Activity (kg) |
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15,000 base |
10,000 |
25,000 |
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Variable costs: |
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Direct materials |
[units × $15] |
225,000 |
150,000 |
375,000 |
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Direct labour |
[units × $5] |
75,000 |
50,000 |
125,000 |
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Direct expenses |
[units × $3] |
45,000 |
30,000 |
75,000 |
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Repairs and maintenance |
[units × $0.8] |
12,000 |
8,000 |
20,000 |
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Power and heating |
[units × $0.3] |
4,500 |
3,000 |
7,500 |
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Total variable costs (TVC) |
361,500 |
241,000 |
602,500 |
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Fixed costs: |
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Depreciation |
20,000 |
20,000 |
20,000 |
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Repairs and maintenance |
4,000 |
4,000 |
4,000 |
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Power and heating |
3,000 |
3,000 |
3,000 |
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Total fixed costs (TFC) |
27,000 |
27,000 |
27,000 |
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Total cost ( TVC+TFC) |
388,500 |
268,000 |
629,500 |
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######
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Click on the link for YouTube videos |
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Accounting Equation |
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Journal Entries in Nepali |
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Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cashbook |
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Trial Balance and Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Click on the link for YouTube videos chapter wise |
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Financial Accounting and Analysis (All videos) |
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Accounting Process |
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Accounting for Long Lived Assets |
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Analysis of Financial Statement |
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######
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2B
Super Metal Industries has following extracted data: (amount in $)
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Activities |
15,000 units |
20,000 units |
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Direct materials |
30,000 |
40,000 |
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Direct labour |
15,000 |
20,000 |
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Depreciation |
5,000 |
5,000 |
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Administrative |
6,000 |
6,000 |
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Repairs |
10,000 |
12,000 |
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Maintenance |
8,000 |
9,000 |
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Required: (1) Variable cost per unit; (2) Total fixed cost; (3) Flexible budget for 10,000 units and 25,000 units
(4) Profit or loss if selling price per unit is $6
[Answer: VCPU = $3.6; Fixed cost = $20,000;
Total variable cost = $36,000; $90,000;
Total cost = $56,000; $110,000; Profit = $4,000; $40,000
SOLUTION:
Calculation for 15,000 units (based)
|
Activities |
Cost basis |
VCPU |
Variable cost |
TC – VC = Fixed cost |
||||
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Direct materials |
Variable |
2.0 |
30,000 |
– |
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Direct labour |
Variable |
1.0 |
15,000 |
– |
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Depreciation |
Fixed |
− |
– |
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5,000 |
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Administrative |
Fixed |
− |
− |
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6,000 |
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Repairs |
Semi-variable |
0.4 |
6,000 |
10,000 – 6,000 = |
4,000 |
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Maintenance |
Semi-variable |
0.2 |
3,000 |
8,000 – 3,000 = |
5,000 |
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Total |
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$3.6 |
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$20,000 |
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Segregation for semi-variable cost |
= Difference in cost ÷ Difference in output |
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Repairs |
= ($12,000 – $10,000) ÷ (20,000 units – 15,000 ) |
= $2,000 ÷ 5,000 |
= $0.4 |
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Maintenance |
= ($9,000 – $8,000) ÷ (20,000 units – 15,000) |
= $1,000 ÷ 5,000 |
= $0.2 |
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Flexible Budget
Super Metal Industries
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Particulars |
Level of Activity (units) |
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Output |
15,000 |
10,000 |
25,000 |
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Variable costs: |
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Direct materials [units × $2] |
30,000 |
20,000 |
50,000 |
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Direct labour [units × $1] |
15,000 |
10,000 |
25,000 |
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Repairs [units × $0.4] |
6,000 |
4,000 |
10,000 |
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Maintenance [units x $0.2] |
3,000 |
2,000 |
5,000 |
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Total variable costs (TVC) |
54,000 |
36,000 |
90,000 |
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Fixed costs: |
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Depreciation |
5,000 |
5,000 |
5,000 |
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Administrative |
6,000 |
6,000 |
6,000 |
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Repairs |
4,000 |
4,000 |
4,000 |
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Maintenance |
5,000 |
5,000 |
5,000 |
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Total fixed costs (TFC) |
20,000 |
20,000 |
20,000 |
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Total cost ( TVC+TFC) |
74,000 |
56,000 |
110,000 |
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Sales revenue (units × $6) |
90,000 |
60,000 |
150,000 |
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Profit or loss (sales – total cost) |
16,000 |
4,000 |
40,000 |
#####
Problems and Answers of Flexible Budget |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2A
Following information is given below by ABC Manufacturing Company:
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Particulars |
10,000 units |
25,000 units |
|
Direct material |
$200,000 |
$500,000 |
|
Direct labor |
$300,000 |
$750,000 |
|
Indirect expenses |
$600,000 |
$825,000 |
|
Depreciation |
$80,000 |
$80,000 |
Required: (a) Variable cost per unit; (b) Budgeted cost for 8,000 units, 15,000 units and 28,000 units by tabular method
[Answer: (a) $15; (b) $10,50,000; $15,05,000 and $23,50,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2B
Costs at two different levels of output are as follows BE Company:
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Activities |
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Output in units |
3,000 units |
5,000 units |
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Direct material |
$15,000 |
$25,000 |
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Direct labour |
$30,000 |
$50,000 |
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Manufacturing overhead |
$16,000 |
$20,000 |
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Office overhead |
$8,000 |
$10,000 |
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Selling overhead |
$3,500 |
$4,500 |
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Selling price per unit |
$25 |
$25 |
Required: Flexible budget for 4,000 units by showing profit
[Answer: Variable cost = $74,000; Fixed cost = $17,000;
Total cost = $91,000; Profit = $9,000]
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