# Budgeting Example 2

1. says

Thank you open tuition for your great assistance in lectures and course notes. Since i have the opportunity few weeks ago, i have benefit a lot of ideas that was never known to me before. Thank you once more and bravo to you all.

2. says

Great lecture. Was previously worried when I didn’t see the solution to the examples in chapter 15 in the course notes and the definition of the different types of budget. The lectures has addressed my concerns. Thanks

3. says

I love the lecture. Thanks to you Sir!

Only facing some problems in semi-variable costing methods. Its confusing.

4. says

Hi, Mr. Moffat. i don’t understand examples four(4) and five(5) of depreciation; sale of non-current assets and revaluation. please, i need a detailed explanation. Thanks.

• says

I am sorry but I have no idea which examples you are asking about – depreciation has nothing to do with budgeting in Paper F2.

I suggest that you watch the F3 lectures on deprecation and if you still have problems then ask in the Ask the Tutor forum and not as a comment under a lecture on something completely different.

• says

Are you sure the question only says “Find out the total expenditure and volume variances”?
(because that could mean more than one thing)

• says

yes sir, i am sure it’s on kaplan kit Budgeting chapter page no. 62 and question no. 206.

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The volume variance is the difference between the original budget profit and the flexed budget profit.
The original budget profit is 120,000. If you flex the budget for sales of 100,000 units, you get a flexed profit of (10,000) (I.e. a loss of 10,000). So the volume variance is 110,000 (adverse)

The expenditure variance is the difference between the flexed budget profit and the actual profit. The flexed profit is a loss of (10,000); the actual profit is 5,000 and so the variance is 15,000 (favourable).

(This question is a bit naughty of Kaplan. Firstly because it should really be in the variances section rather than the budget section, and secondly because ‘expenditure’ variance isn’t really the correct name.)

5. 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)?

• 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

• says

Why did you add 1,400 units (c/inventory) to the production of month 2?

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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.