Question

1. The following is the cost of an article at a capacity level of 5000 units as given under A. For a variation of 25% in capacity above or below this level, the individual expenses vary as indicated under B.

                                                                     A                            B                                                    

                                                      $                             %

Material Cost                              25,000                    100

Labor Cost                                   15,000                    100

Power                                             1,250                      80

Repairs and maintenance           2,000                      75

Stores                                             1,000                    100

Inspection                                        500                      20

Depreciation                               10,000                        -

Administrative OH                        5,000                     25

Selling                                              3,000                      50

Total Cost                                     62,750

Cost per unit                                                 12.55

Required:

Find the unit cost of production under each individual expense at the level of 4000 and 6000 units by preparing a flexible budget.

Answer 1

Fixed costs are those costs which would remain the same in total irrespective of level of production or sales. It is a committed cost to be incurred by the firm whether it carries out operations or not. Variable costs are those costs which would remain the same per unit irrespective of level of production or sales. It is an unit cost to be incurred by the firm only when the firm carries out its business operation. At 4,000 units Variable Units Cost per unit (b) Fixed costs Cost per unit (e) / (b) Total costs (d) (e) = (c) + (d) $0 So $250 $500 Material Cost Labor Cost Power Repairs and maintenance Stores Inspection Depreciation Administrative Selling Total Cost Total variable cost (c) = (a) (b) $20,000 $12,000 $800 $1,200 $800 $80 $5.00 $3.00 $0.26 $0.43 $0.20 $0.12 $2.50 $1.19 $0.68 $13.37 $5.00 $3.00 $0.20 $0.30 $0.20 $0.02 $0.00 $0.25 $0.30 4,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000 $o $20,000 $12,000 $1,050 $1,700 $800 $480 $10,000 $4,750 $2,700 $53,480 $0 $1,000 $1,200 $37,080 $400 $10,000 $3,750 $1,500 $16,400

At 6,000 units Cost per Units Fixed costs Total costs Variable Cost per unit unit (e)/(b) (b) (d) (e) = (c) + (d) (a) $0 Total variable cost (c) = (a) x (b) $30,000 $18,000 $1,200 $1,800 $1,200 $0 $250 $500 Material Cost Labor Cost Power Repairs and maintenance Stores Inspection Depreciation Administrative Selling Total Cost $5.00 $3.00 $0.20 $0.30 $0.20 $0.02 $0.00 $0.25 $0.30 $5.00 $3.00 $0.24 $0.38 $0.20 $0.09 $1.67 $0.88 $0.55 $12.00 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 $0 $30,000 $18,000 $1,450 $2,300 $1,200 $520 $10,000 $5,250 $3,300 $72,020 $120 $0 $1,500 $1,800 $55,620 $400 $10,000 $3,750 $1,500 $16,400

Workings: C=AB D=A-C E Dollar Variable % Variable $ Fixed $ Units 100% 100% 80% $25,000 $15,000 $1,000 $1,500 $1,000 Material Cost Labor Cost Power Repairs and maintenance Stores Inspection Depreciation Administrativ OH Selling Total Cost $25,000 $15,000 $1,250 $2,000 $1,000 $500 $10,000 $5,000 $3,000 $62,750 $0 $ 0 $250 $500 $0 $400 $10,000 $3,750 $1,500 $16,400 C/E Variable Per Unit $5.00 $3.00 $0.20 $0.30 $0.20 $0.02 $0.00 $0.25 $0.30 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 A/E Total cost Per Unit $5.00 $3.00 $0.25 $0.40 $0.20 $0.10 $2.00 $1.00 $0.60 75% 100% 20% 0% 25% 50% $100 $0 $1,250 $1,500 $46,350