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Which part of the question do you want help with?
The main point of the question is that it is silly to compare the actual costs with the budget costs. The reason is that because we have produced more, we would expect the variable costs to be higher anyway!
The main purpose of variances is to see if the managers are over/under spending. However it is not the fault of the individual managers if we produce more and therefore spend more!!
To make it more sensible/useful we need to rewrite the budget and calculate what we would expect to spend for the actual level of production.
So…….(for example) material were budgeted as 168 for production of 640 units.
But since we actually produced 720 units, we would have expected the material cost to be 720/640 x 168 = 189.We actually spent 144, and so the manager did very well indeed and spent 45 less than we would have expected.
For more, I suggest that you watch the lecture on this website on this topic.
The following monthly budgeted cost values have been taken from the budget working papers
of MZ Limited for the year ended 30 September 20X8.Activity level
$ $ $60 % 70% 80 %
Direct materials 30,000 35,000 40000
Direct labour 40,500 47,250 54,000
Production OH 46,000 52,000 58,000
Selling overhead 15,000 17,000 19,000
AdministrationOH 28,000 28000 28000
total ______ _____ _____
159500 179250 19900
_____ ______ ______
During September 20X8, actual activity was 1,292 units (which was equal to 68% activity) and
actual costs were:
Direct materials 33,500
Direct labour 44,000
Production overhead 46,250
Selling overhead 16,150
Administration overhead 27800
total ___________
167,700
Required:
(a) Prepare a budgetary control statement for MZ Limited on a flexible budget basis for
the month of September 20X8. The statement should include the flexed budget, the
actual results and the variance for each of the five costs. (12 marks)
(b) Explain the difference between fixed and flexible budgets, and state when each
should be used to control costs.
pls help .. i find frm ur lectures fixed n flexed are so easy .. but this is question is annoyin me .. i dun no how to deal wid this ..!!Firstly, if 68% activity is 1292 units, then 100% activity would be 1292/.68 = 1900 units.
That means that costs given at the start of the question are for (60%) 1140 units; (70%) 1330 units; and (80%) 1520 units.
Second, for each cost you need to work out what is the variable cost per unit, and what is the fixed cost.
So……administration is obviously a fixed cost and is 28000 for any number of units. Direct materials is a variable cost and is 30000/1140 = 26.316 per unit (or 35000/1330 or 40000/1520 – they all give the same figure).
However for production overheads – they are obviously not completely fixed, but also the are not completely variable (because dividing by units gives a different cost per unit each time). So they must be part fixed and part variable (semi-variable) and you need to use the high-low method to calculate the variable cost per unit and the fixed cost. (Look at the Course Notes if you have forgotten the high-low method).
When you have the fixed costs and variable costs per unit for each of the costs, then you can use them to prepare a flexed budget for the actual activity of 1292 units.
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