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 John Moffat 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 John Moffat 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.

  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 John Moffat 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%

  5. Avatar of m1n2b3v says

    i feel sorry for you and you might send your students to TIME OUT for not remembering the term CONTRIBUTION………..even i named the term when you asked…………

  6. Avatar of nakeshia says

    I have a question.

    QT co. Manufactures a single product and an extract from their flexed budget for production costs is as follows.
    80%. 90%
    Direct material. 2400. 2700
    Labour. 2120. 2160
    Production o/h. 4060. 4080

    What would the total production cost allowance be in a budget flexed at the 83% level of activity?

    I keep on getting 7121.4 which is wrong. Any help plz???????

    • Avatar of John Moffat says

      You need to us high/low because some of the costs are variable and some of the costs are fixed.

      The total cost for 80% is 2400 + 2120 + 4060 = 8580
      The total cost for 90% is 2700 + 2160 + 4080 = 8940

      So, the variable cost for 10% is 8940 – 8580 = 360.
      So the variable cost for 3% (83% – 80%) is 3/10 x 360 = 108

      So the total cost for 83% is 8580 (the cost for 80%) + 108 (the extra variable cost for the extra 3%) = 8688.
      (there is obviously no extra fixed cost for the extra 3%)

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