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%

Range of production overhead costs=$(33,500-30,500)=$3,000

Therefore, variable cost per 1% change in activity=$3,000/20=$150

Working 2:

Fixed cost=$33,500(90% x$150)=$20,000

Leave a Comment Cancel reply