Question

1. Prepare a flexible budget on the basis of these expenses and sales value relating to a cost centre when operating at 90%,100% and 110% of normal capacity. The data are for 80% operating capacity.

                                                                  $

               Sales                                         120,000

               Administrative Costs                  

               Office Salaries                         3,000

               General expenses                    1.5% of sales    

               Depreciation                            1,500

               Rates and taxes                       1,750

                Selling Costs

                Salaries                                     4% of sales

                Travel                                        1.5% of sales

                General Expenses                    1% of sales

                Distribution Costs

                 Wages                                        3,000

                 Rent                                            0.5 of sales

                 Other Expenses                         2% of sales

Answer 1

flexible budget changes with the change in levels of activity.It is a budget which recognizes the effect of fluctuations in sales on variable , fixed and mixed cost.it is well known fact that estimated activity of budget is not always correct and that changes will have to be made as per actual known activity level to find exact variances.variable costs changes with change in levels of activity however fixed cost remains same at all levels.

we will prepare flexible budget

capacity	80%	90%	100%	110%
sales (A)	$120,000	$135,000 [$120000/80%]*90%	$150,000 [$120,000/80%]*100%	$165,000 [$120,000/80%]*110%
variable costs
administrative costs
General expenses	$1,800 [120,000*1.5%]	$2,025 [135,000*1.5%]	$2,250 [150,000*1.5%]	$2,475 [165,000*1.5%]
selling costs
salaries	$4,800 [$120,000*4%]	$5,400 [$135,000*4%]	$6,000 [$150,000*4%]	$6,600 [$165,000*4%]
travel	$1,800 [$120,000*1.5%]	$2,025 [$135,000*1.5%]	$2,250 [$150,000*1.5%]	$2,475 [$165,000*1.5%]
general expenses	$1,200 [$120,000*1%]	$1,350 [$135,000*1%]	$1,500 [$150,000*1%]	$1,650 [$165,000*1%]
Distribution costs
Rent	$60,000 [$120,000*0.5]	$67,500 [$135,000*0.5]	$75,000 [$150,000*0.5]	$82,500 [$165,000*0.5]
Other expenses	$2,400 [$120,000*2%]	$2,700 [$135,000*2%]	$3,000 [$150,000*2%]	$3,300 [$165,000*2%]
Total variable expenses (B)	$72,000 [$1800+4800+1800+1200+60000+2400]	$81,000 [$2025+5400+2025+1350+67500+2700]	$90,000 [$2250+6000+2250+1500+75000+3000]	$99,000 [2475+6600+2475+1650+82500+3300]
Fixed overhead
administrative costs
office salaries	$3,000	$3,000	$3,000	$3,000
depreciation	$1500	$1,500	$1,500	$1,500
Rates and taxes	$1,750	$1,750	$1,750	$1,750
distribution cost
wages	$3,000	$3,000	$3,000	$3,000
Total fixed costs (C)	$9,250	$9,250	$9,250	$9,250
Total costs(B)+(C)= D	$81,250 [$72,000+9250]	$90,250 [$81,000+$9250]	$99,250 [$90,000+$9250]	$108,250 [$99,000+$9250]
Net income (A)-(D)	$38,750 [$120,000-81,250]	$44,750 [$135,000-$90,250]	$50,750 [$150,000-$99,250]	$56,750 [$165,000-$108,250]

the costs that percentage of sales are variable as they will change with change in sales like general expenses, salaries, travel rent, other expense.

fixed costs like depreciation , rates and taxes etc are fixed in nature. level of activity does not affect such costs. they will remain constant at any level of capacity.