Using the following information, prepare a flexible budget for the production of 80% and 100% activity. The following data is available in a manufacturing company for a yearly period. 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: For this task, prepare a flexible budget for the year and forecast the profit at 60%, 75%, 90%, and 100% capacity. 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:Problem 1
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 Units50%
5,00080%
8,000100%
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
$
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
50%
Capacity
100
60%
Capacity
120
75%
Capacity
150
90%
Capacity
180
100%
Capacity
200
Solution
Flexible Budget
50% ($)
60% ($)
75% ($)
90% ($)
100% ($)
(A)
Variable Expenses
Material
21,70,000
26,04,000
32,55,000
39,06,000
43,40,000
Labor
20,40,000
24,48,000
50,60,000
36,72,000
40,80,000
Other Expenses
7,90,000
9,48,000
11,85,000
14,22,000
15,80,000
Semi-variable Expenses
Maintenance and Repairs
3,50,000
3,50,000
3,85,000
4,20,000
4,20,000
Indirect labor
7,90,000
7,90,000
8,69,000
9,48,000
9,48,000
Sales Department Salaries
3,80,000
3,80,000
4,18,000
4,56,000
4,56,000
Sundry Expenses
2,80,000
2,80,000
3,08,000
3,36,000
3,36,000
Fixed Expenses
Wages and Salaries
9,50,000
9,50,000
9,50,000
9,50,000
9,50,000
Rent/Rates and Taxes
6,60,000
6,60,000
6,60,000
6,60,000
6,60,000
Depreciation
7,40,000
7,40,000
7,40,000
7,40,000
7,40,000
Sundry Admin
6,50,000
6,50,000
6,50,000
6,50,000
6,50,000
Total Cost (A)
98,00,000
108,00,000
124,00,000
141,60,000
152,60,000
Sales (B)
100,00,000
120,00,000
150,00,000
180,00,000
200,00,000
Profit (A - B)
2,00,000
12,00,000
25,20,000
38,40,000
47,40,000
Problem 3
Solution
Output: 10,000 units (50% capacity)
Output: 12,000 units (60% capacity)
Output: 16,000 units (80% capacity)
Per unit ($)
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
Flexible Budget Practical Problems and Solutions FAQs
There are many limitations, but some of the main ones include; it only works if the assumption holds, if there is an increase in production, it can place excess burdens on current staff and create more work for them until demand falls again, etc.
A flexible budget is a tool used in the preparation of financial statements. It allows companies to prepare budgets under different scenarios to be adjusted for future projections.
They allow managers to predict the effect that changes will have on their company's income statement and balance sheet while still being able to reflect actual figures. It helps to provide accurate forecasts without using theoretical data since they are based on what occurred.
It is [(actual output quantity * actual input price) – (actual input quantity * actual input price)] all divided by actual input price.
Flexible budgets are created to reflect different scenarios to be adjusted in response to changes in an organization's environment, while actual budgets are based on accurate figures used for planning purposes or even forecasting future earnings.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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