Simple Illustration Of How To Compute Using Flexible Budgeting

Earlier article describe what is flexible budget. Below is a simple illustration of flexible budgeting.

Company ABC manufactures a single product and has produced the following flexed budget for the year.Level Of Activity

 70% 80% 90% \$ \$ \$ Direct materials 17,780 20,320 22,860 Direct labor 44,800 51,200 57,600 Production overhead 30,500 32,000 33,500 Administration overhead 17,000 17,000 17,000 Total cost 110,080 120,520 130,960

Question: Prepare a budget flexed at the 45% level of activity

Answer:[Guide:To flex the budget, we need to determine which costs are semi-variable and calculate the variable cost per 1% change in activity as (range of cost)/(range of activity) and fixed costs as total cost minus variable cost at that activity level. Calculate a cost per 1% for all the variable costs, flex them to 45% and deduct the fixed costs]

 Variable costs \$ per 1% \$ Direct materials 254 11,430 Direct labor 640 28,800 Production overhead 150(working 1) 6,750 Fixed costs \$ Production overhead(working 2) 20,000 Administration overhead 17,000 37,000 Total budget cost allowance 83,980

Working 1:

Production overhead is a semi-variable cost

Range of activity=90%-70%=20%