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

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