Problem 1
Using the following information, prepare a flexible budget for the production of 80% and 100% activity.
| 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 Units |
50% 5,000 |
80% 8,000 |
100% 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
The following data is available in a manufacturing company for a yearly period.
| $ | |
| 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 |
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:
| 50% | Capacity | 100 |
| 60% | Capacity | 120 |
| 75% | Capacity | 150 |
| 90% | Capacity | 180 |
| 100% | Capacity | 200 |
For this task, 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 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
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:
- Material: $100
- Labor: $30
- Factory overhead: $30 (40% fixed)
- Admin overhead: $20 (50% fixed)
Solution
| Output: 10,000 units (50% capacity) | Output: 12,000 units (60% capacity) | Output: 16,000 units (80% capacity) | ||||
| Per unit ($) | 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.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
