Problem 1
Using the following information, prepare a flexible budget for the production of 80% and 100% activity.
| Production at 50% Capacity | 5,000 Units |
| Raw Materials | $80 per unit |
| Direct Labor | $50 per unit |
| Direct Expenses | $15 per unit |
| Factory Expenses | $50,000 (50) (Fixed) |
| Administration Expenses | $60,000 (Variable) |
Solution
| Flexible Budget at a Capacity of | |||
| Capacity of Output Units | 50% 5,000 | 80% 8,000 | 100% 10,000 |
| $ | $ | $ | |
| Raw Materials | 4,00,000 | 6,40,000 | 8,00,000 |
| Labor | 2,50,000 | 40,000 | 50,000 |
| Direct Expenses | 75,000 | 1,20,000 | 1,50,000 |
| Prime Cost | 7,25,000 | 11,60,000 | 14,50,000 |
| Factory Expenses 50% Fixed (50,000) | 25,000 | 40,000 | 50,000 |
| Factory Cost | 7,75,000 | 12,25,000 | 15,25,000 |
| Admin Expenses 40% Fixed (60,000) | 24,000 | 24,000 | 24,000 |
| Variable 60% | 36,000 | 57,600 | 72,000 |
| Total Cost | 8,35,000 | 13,06,000 | 16,21,000 |
Problem 2
The following data is available in a manufacturing company for a yearly period.
| $ | |
| Fixed Expenses | |
| Wages and Salaries | 9,50,000 |
| Rent/Rates and Taxes | 6,60,000 |
| Depreciation | 7,40,000 |
| Sundry Admin Expenses | 6,50,000 |
| Semi-variable Expenses at 50% Capacity | |
| Maintenance and Repairs | 3,50,000 |
| Indirect Labor | 7,90,000 |
| Sales Department Salaries, etc. | 3,80,000 |
| Sundry Admin Salaries | 2,80,000 |
| Variable Expenses | |
| Materials | 21,70,000 |
| Labor | 20,40,000 |
| Other Expenses | 7,90,000 |
| Total | 98,00,000 |
You should assume that the fixed expenses remain constant for all levels of production.
Semi-variable expenses remain constant between 45% and 65% capacity, increasing by 10% between 65% and 80% capacity, and by 20% between 80% and 100% capacity.
The sales at various levels of capacity are the following:
| 50% | Capacity | 100 |
| 60% | Capacity | 120 |
| 75% | Capacity | 150 |
| 90% | Capacity | 180 |
| 100% | Capacity | 200 |
For this task, prepare a flexible budget for the year and forecast the profit at 60%, 75%, 90%, and 100% capacity.
Solution
| Flexible Budget | |||||
| 50% ($) | 60% ($) | 75% ($) | 90% ($) | 100% ($) | |
| (A) | |||||
| Variable Expenses | |||||
| Material | 21,70,000 | 26,04,000 | 32,55,000 | 39,06,000 | 43,40,000 |
| Labor | 20,40,000 | 24,48,000 | 50,60,000 | 36,72,000 | 40,80,000 |
| Other Expenses | 7,90,000 | 9,48,000 | 11,85,000 | 14,22,000 | 15,80,000 |
| Semi-variable Expenses | |||||
| Maintenance and Repairs | 3,50,000 | 3,50,000 | 3,85,000 | 4,20,000 | 4,20,000 |
| Indirect labor | 7,90,000 | 7,90,000 | 8,69,000 | 9,48,000 | 9,48,000 |
| Sales Department Salaries | 3,80,000 | 3,80,000 | 4,18,000 | 4,56,000 | 4,56,000 |
| Sundry Expenses | 2,80,000 | 2,80,000 | 3,08,000 | 3,36,000 | 3,36,000 |
| Fixed Expenses | |||||
| Wages and Salaries | 9,50,000 | 9,50,000 | 9,50,000 | 9,50,000 | 9,50,000 |
| Rent/Rates and Taxes | 6,60,000 | 6,60,000 | 6,60,000 | 6,60,000 | 6,60,000 |
| Depreciation | 7,40,000 | 7,40,000 | 7,40,000 | 7,40,000 | 7,40,000 |
| Sundry Admin | 6,50,000 | 6,50,000 | 6,50,000 | 6,50,000 | 6,50,000 |
| Total Cost (A) | 98,00,000 | 108,00,000 | 124,00,000 | 141,60,000 | 152,60,000 |
| Sales (B) | 100,00,000 | 120,00,000 | 150,00,000 | 180,00,000 | 200,00,000 |
| Profit (A – B) | 2,00,000 | 12,00,000 | 25,20,000 | 38,40,000 | 47,40,000 |
Problem 3
A factory is currently working at 50% capacity and produces 10,000 units. Estimate the profits of the company when the factory works at 60% and 80% capacity, and offer your critical comments.
At 50% capacity, the cost of working raw materials increases by 2% and the selling price falls by 2%.
At 80% capacity, the working raw materials cost increases by 5% and selling price falls by 5%.
Additionally, at 50% capacity, working the product costs $180 per unit and it is sold at $200 per unit.
The unit cost of $180 consists of the following:
- Material: $100
- Labor: $30
- Factory overhead: $30 (40% fixed)
- Admin overhead: $20 (50% fixed)
Solution
| Output: 10,000 units (50% capacity) | Output: 12,000 units (60% capacity) | Output: 16,000 units (80% capacity) | ||||
| Per unit ($) | Total ($) | Per unit ($) | Total ($) | Per unit ($) | Total ($) | |
| Sales Value | 200 | 20,00,000 | 196 | 23,52,000 | 190 | 30,40,000 |
| Material Cost | 100 | 10,00,000 | 102 | 12,24,000 | 105 | 16,80,000 |
| Labor Cost | 30 | 3,00,000 | 30 | 3,60,000 | 30 | 4,80,000 |
| Variable Factory Overhead | 18 | 1,80,000 | 18 | 2,16,000 | 18 | 2,88,000 |
| Fixed Factory Overhead | 12 | 1,20,000 | 10 | 1,20,000 | 7.50 | 1,20,000 |
| Variable Admin Overhead | 10 | 1,00,000 | 10 | 120,000 | 10 | 1,60,000 |
| Fixed OH | 10 | 1,00,000 | 8.33 | 1,00,000 | 6.25 | 1,00,000 |
| Total Cost | 180 | 18,00,000 | 178.33 | 21,40,000 | 176.25 | 28,28,000 |
| Profit | 20 | 2,00,000 | 17.67 | 2,12,000 | 13.25 | 2,12,000 |
References : Books of ICWAI & CMA