Question

Using marginal cost format, prepare a flexible budget for 17,200 units and show all the variances indicating which are favourable and which are adverse. Suggest a possible reason for each variance. [14 marks]

b) Flexible budgets have been prepared for two output levels as follows; Production and sales 15000 20000 Sales revenue £ 150000 200000 Direct materials Direct labour Depreciation Maintenance 105000 15000 1500 2000 140000 20000 1500 2400 Total costs 123500 163900 Profit 26500 36100 Actual production and sales were 17200 and actual costs and revenues were; Sales revenue 171000 Direct materials Direct labour Variable maintenance costs Fixed maintenance costs Depreciation Total costs 114000 18900 1500 825 1500 136725 Profit 34275 Using a marginal cost format, prepare a flexible budget for 17,200 units and show all the variances indicating which are favourable and which are adverse. Suggest a possible reason for each variance (14 marks)

Answer 1

Flexible Budgeting and Variances of Actual results:
	Actual Results	Flexible Budget	Variances	F/U/N		Calculation of Flexible budget
Units Produced and sold	17200	17200	0
Sales revenue	171000	172000	-1000	U		150000*17200/15000
Expenses:
DM	114000	120400	-6400	F		105000*17200/15000
DL	18900	17200	1700	U		15000*17200/15000
Variable maintenance costs	1500	1376	124	U		(2400-2000)*17200/(20000-15000)
Fixed maintenance costs	825	800	25	U		2000-(0.08*15000)
Depreciation FC	1500	1500	0	N
Total Costs	136725	141276	-4551	F
Profit	34275	30724	3551	F

Suggestions :

1) DL : The overtime and idle time should be reduced.

2) VMC : The wastages while doing maintenance service should be controlled.

3) FMC : Lower level contracts of maintenance should be called for.