Flexible Budget Practical Problems and solutions

Problem 1

Prepare a flexible budget for the production of 80% and 100% activity on the basis of the following information.

Production at 50% Capacity	5,000 Units
Raw Material	$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 Material	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 fixed 40% (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 are available in a manufacturing company for a yearly period:

	$
Fixed expenses:
Wages and Salaries	9,50,000
Rent, Rate & Taxes	6,60,000
Depreciation	7,40,000
Sundry Admin Expenses	6,50,000
Semi Variable Expenses at 50% Capacity:
Maintenance & Repairs	3,50,000
Indirect Labor	7,90,000
Sales Deptt. Salaries etc.	3,80,000
Sundry Admin Salaries	2,80,000
Variable Expenses:
Material	21,70,000
Labor	20,40,000
Other Expenses	7,90,000
Total	98,00,000

Assume that the fixed expenses remain constant for all levels of production, the semi-variable expenses remain constant between 45% and 65% capacity; increasing by 10% between 65 percent and 80 percent capacity; and by 20 percent between 80% and 100% capacity.

Sales at various levels are:

50%	Capacity	100
60%	Capacity	120
75%	Capacity	150
90%	Capacity	180
100%	Capacity	200

Required:

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 & 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 Deptt. 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 & Salaries	9,50,000	9,50,000	9,50,000	9,50,000	9,50,000
Rent/Rates & 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 to 50% capacity and produces 10,000 units. Estimate the profits of the company when it works at 60% and 80% capacity and offer your critical comments.

At 50% working raw material cost increases by 2% and selling price falls by 2%. At the 80% working raw material cost increases by 5% and selling price falls by 5%.

At 50% working the product costs $180 per unit and is sold at $200 per unit.

The unit cost of $180 is made up as follows:

Material: 100
Labor: 30
Factory overhead: 30 (40% fix)
Admn. overhead: 20 (50% fix)

Solution

	Output: 10,000 unit 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 Admn. 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