1. avatar says

    Sir, how to work this out?
    A company manufactures a single product. Budgeted production for the first three months of next year is as follows :
    Month 1 :8k units
    Month 2 : 9k units
    Month 3 : 7k units
    Each unit uses 4kg of raw material costing $5 per kg. The budgeted raw material inventory at the end of each month is to be 20% of the following months production.
    What are the budgeted raw material purchases for month 2 of next year (in $’s)?
    (answer is $172,000)

    • Avatar of johnmoffat says

      Opening inventory for month 2 = 20% x 9,000 = 1,800
      Closing inventory for month 2 = 20% x 7,000 = 1,400
      So production in month 2 = 9,000 + 1,400 – 1,800 = 8,600

      So raw materials = 8,600 x 4 a 5 = $172,000

      • Avatar of johnmoffat says

        We sell 9,000. We start with 1800 in inventory, so that means we only need to produce 9000 – 1800. However we would then end up with no inventory at the end, but we want to have 1400 in inventory, so we need to make an additional 1400.

        Sales units are always equal to opening inventory + production – closing inventory.

  2. avatar says

    Sir, i have a question. a company uses flexed budgets. The fixed budget last month was based on 100% activity level and showed material costs of $200k. Last months actual material cost were $120k and showed a favourable variance of $5000 when compared with the flexed budget. What was the actual level of activity last month as a %?

    (answer is 62.5%)
    p.s i got wrong for this when doing the revision mock exam.

    • Avatar of johnmoffat says

      If actual costs had a favourable variance then the standard cost for the actual production would be 125,000. Since the original budget was 200,000, the activity level must be 125/200 = 62.5%

  3. avatar says

    HI sir there one problem in Flexed budget on Variable overhead side
    Variable OH Per unit = $12,500 / 10,000 Units = $2 per unit
    if we multiply it by actual level of activity we will get $24,000 for variable overhead in flexed budget

  4. avatar says

    Hi johnmoffat

    A Co. uses Flexed Budgets:The fixed budget last month was baase on 100% Activity level and show material cost of
    $200,000. Last month’s actual material cost were compared with the flexed budget and show the follow:

    material Actual 120,000 Variance 5000 favourable

    What was the actual activity last month as a percentage

    • Avatar of johnmoffat says

      Because the variance was 5000 favourable, it means that the flexed budget will show materials of 125,000.

      The original budget at 200,000, and so the actual activity must have been 125,000/200,000 x 100%

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