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Hi John,
In the Mock/Revision Exam there is a question:
‘AAA CO had budgeted production of 40,000 units for December, and the budgeted costs were: Materials: £120,000, Labour: £200,000 & Fixed Overheads: £350,000
The actual production in December was 35,000 units
What is the flexed budget total costs?’
So to figure this out i did-
120,000/40,000= £3 per unit (* 35,000 units)= £105,000
200,000/40,000= £5 per unit (*35,000 units)= £175,000
350,000/40,000=£8.75 per unit (*35,000)= 306,250The answer is saying i should have done- 35,000/40,000* (120,000+200,000) +350,000= 630,000
I am not entirely clear on how the answer has been come to here, in the lecture video, to flex the budget you figure out the original budgeted amount (by figuring out the per unit) and then ‘flexing’ based on the actual new production of units.
The answer seems to suggest i do something different entirely?
By definition, the fixed overheads in total stay fixed at $350,000 regardless of the level of production. (And that is what I do in my lectures on budgeting).
Hi Mr Moffat, Here I have a question on Kaplan:
A company manufactures a single product and has the following flexible production cost
budgets for a period.
Production quantity 12,000 units 15,000 units 18,000 units
Direct material AB $3,600 $4,500 $5,400
Direct material CD $17,760 $22,200 $26,196
Labour (direct and indirect) $25,700 $29,900 $35,150
Overhead (excluding indirect labour) $12,400 $13,180 $13,960The question asks:
Calculate the flexed statement for the period showing for each of the four
items of cost and calculate the variance indicating if it is favourable (f) or
adverse (a) (to the nearest whole $)Flexed budget Flexed Actual cost Variance
Activity level 17,000 17,000
Costs
Material AB 5,025
Material CD 25,118
Labour 32,889
Overhead 13,315The answer gives:
I sort of understood the answer for the labour and the overhead given the high low method whereby we find the fixed cost and add it on the flexed figure of 17000 times 1.58 (the variable cost).
For Material AB i found the standard cost per unit to be $0.30 and it perfectly matches with the answer provided. However, I am having a very hard time finding the Method of calculating/finding the Standard cost per unit for Material CD. I have been stuck on this question for a very long time. I have tried all of your lecture videos but cannot find nothing that could help. Please, could you help with the Material CD answer step by step solution.Thank you very much in advance
Either there is a mistake in the Kaplan question or there is more information that you have not typed out.
The direct materials are variable costs and therefore the high-low approach is of no relevance for them.
Material AB is obviously a variable cost because the cost per unit is $3600/12000 = $0.30, and this is the same at each of the production levels.
For material CD, at the 12,000 level the cost per unit is 17,760/12,000 = $1.48 per unit. At the 15,000 level it is 22,200/15,000 = $1.48 per unit.
However at the 18,000 level it is 26,196/18,000 = $1.455 per unit. The only possible reason for it being less than $1.48 is because there is a discount given for purchases of bigger quantities. However if that was the case then the question would have to tell you how big the quantity has to be in order to get the discount, otherwise we cannot calculate how much 17,000 units should cost.Goodafternoon Mr Moffat,
the high low method was for the overheads,
And yes, as for discount the question stated:
The supplier of Material CD gives a 10% discount on the excess of purchases over 6,000
kg per period.
During the period, the company manufactured 17,000 units of the product and
incurred the following production costs:
Direct materials:
Material AB $5,025
Material CD $25,118
Labour (direct and indirect) $32,889
Overhead (excluding indirect labour) $13,315The figures in the question as you have typed them just do not make it work.
If there was a discount for purchases in excess of 6,000 then for the production levels of 12,000 and 15,000 the first 6,000 would be at one price and the extra would be at a different price. This cannot possibly be the case because it is was then the overall price per unit in both cases would not be the same at $1.48 per unit..
It would make sense if the discount was for purchases in excess of 16,000 (and if the discount for purchases in excess of 16,000 was 15% and not 10%). If it was for purchases in excess of 16,000 then the price per unit at the levels of 12,000 and 15,000 units would be $1.48. This would then mean that the price per unit in excess of 16,000 units would be 85% x $1.48 = $1.258
In that case the cost for 18,000 units would be (16,000 x $1.48) + (2,000 x $1.258) = $26,196 (as per the question).
So then, the flexed cost for 17,000 units would be (16,000 x $1.48) + (1,000 x $1.258) = $24,938.
It does seem that Kaplan have made a big mess. Again, they should have written that the discount is 15% for purchases in excess of 16,000 !!!
Sir I’ll retype this question, as i still seem to have confusion.
Q: A company manufactures a single product and has the following flexible production cost budgets for a period.
Production quantity 12,000units 15,000units 18,000units
Direct material AB $3,600 $4,500 $5,400
Direct material CB $17,760 $22,200 $26,196Labour (direct and indirect) $25,700 $29,900 $35,150
Overhead (excluding indirect labour) $12,400 $13,180 $13,960
The budget includes the following assumptions:
~ Each unit of the product requires:
Material AB: 0.2kg
Material CD: 0.4kg
Direct labour: 0.2 hours~the supplier of Material CD gives a 10% discount on the excess of purchases over 6,000 kg per period.
During the period, the company manufactured 17,000 units of the product and incurred the following production costs:
Direct materials:
Material AB: $5,025
Material CD: $25,118
Labour (direct and indirect): $32,889
Overhead (excluding indirect labour):$13,315Required:
(a) Calculate the budgeted cost per kg of Material CD on the excess of purchases over 6,000 kg per period (to 2 decimal places).
(b) Calculate the flexed statement for the period showing for each of the four
items of cost and calculate the variance indicating if it is favourable (f) or
adverse (a) (to the nearest whole $)Flexed budget :Actual cost :Variance
Activity level 17,000 :17,000: 0
Costs
Material AB 5,025
Material CD 25,118
Labour 32,889
Overhead 13,315(c) the purchase price of Material AB in the period was as per budget.
Calculate the material usage variance (in kg) for Material AB (to the nearest whole kg).
I typed entire question with what is required, I’d really appreciate it if you can re-explain everything, i can’t figure out the answer for the requirements, thankyou in advance sir!
As I wrote in my previous reply, it is clear that Kaplan have made a big mess of this question.
For material CD the figures only make sense is the discount is 15% for purchases in excess of 16,000.
You cannot expect me to provide a full answer to a question that obviously has a mistake in it.
I suggest that you look on the Kaplan website to see if they have an errata sheet available listing the errors in their material.
Okay sir, I’ll take a look on the kaplan website, could you just explain the 3rd requirement? Rest I’ll figure it out from the website if they have an errata sheet like you said.
(c) the purchase price of Material AB in the period was as per budget.
Calculate the material usage variance (in kg) for Material AB (to the nearest whole kg).
The standard material cost per unit for AB is $0.30.
Therefore the standard cost is 0.2kg at $1.50 per kg.For 17,000 units they should have used 17,000 x 0.2 = 3,400 kg
They actually used 5,025/1.50 = 3,350 kgTherefore the usage variance is 50 x 1.50 = $75 (favourable)
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