Budgeting

Hi Sir,

Hope ur fine.

I hv a problem regarding to budgeting.

QT Co. manufactures a single product and an extract from their flexed budget for production costs is as follows.

Activity level: 80%

Direct material $ 2400
Labour $ 2120
Production Overheads $ 4060
Total $ 8580

Activity level 90%

Direct materials $ 2700
Labour $ 2160
Production Overheads $ 4080
Total $ 8940

What would the total production cost allowance be in a budget flexed at the 83% level of activity? (to the nearest $)

A. $ 6266
B. $6888
C. $ 8586
D. $ 8688

Okay, here’s where my problem began.

Labour & production overhead:

At 90%, activity $6240
At 80%, activity $6180
Change 10%, activity $60

From where they got $ 6240 & $ 6180??

Then they got $6 as VC per 1% of activity, which i understood the calculation, however, they again did the calculation:

substituting in 80% activity:

Fixed cost of labour & production overhead = $6180 – (80 x $6) = $5700.

So does this mean that Activity level of 80% was fixed budget or flexed budget that we have to use to identify the actual variance?

It would be very helpful if u’d help me over here with this type of question.

Thanks in advance & hope to hear from you soon.