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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 $13,960
The budget includes the following assumptions:
(i) Each unit of the product requires:
Material AB 0.2 kg
Material CD 0.4 kg
Direct labour 0.2 hours
(ii) 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) $13,315
Required:
(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).asnwer.To produce 12,000 units it would use 12,000 × 0.4 = 4,800 kg
Material CD, cost per kg up to 6,000 units = $17,760/4,800 kg = $3.70
Over 6,000 units discount 10%
Budgeted cost per kg of material CD = $3.33
Alternative method using 18,000 units
18,000 × 0.4 kg = 7,200 kg used
6,000 × 3.70 = $22,200
7,200kg cost $26,196
Difference = $3,996/1,200 kg = $3.33I don’t understand what they have done here. The question clearly says discounts can only be availed on material purchased in excess of 6000kg
from my calculation, if company produces 18000 units, then only it will have material requirement above 6000kg and at this level the cost per kg is 1.46 (26196/18000). The budgeted cost per kg after discount for materials in of excess of 6000kg should be 1.46/100*90 = 1.31
Can you please explain the answer given in the book or is the answer is wrong?
For my previous, are we using 12000 units because we have to assume that it’s the Fixed budgeted units for the period and as the question asks for budgeted cost per kg on the excess of purchases of 6000kgs, we use 12000 units to calculate the std cost of 3.70 and then apply discount?
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 $)at flexed budget of 17000 units, we become eligible for discount as 17000 units require 6800 kgs of materials. So, the 6000kgs of these materials would cost $3.70 per kg and the remaining 800 kgs (in excess of 6000kg and hence at discount) would cost $3.33 per kg. The total should be then $24864. Shouldn’t this be the right answer?
question 3. 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 $)answer. Labor flexed budget 33,570, Actual cost 32,889
(W1) Labour (direct and indirect)
High Low Difference
Activity 18,000 units 12,000 units 6,000 units
Cost $35,150 $25,700 $9,450
Variable element of cost $9,450/6,000 units = $1.58 per unit.
Fixed cost:
Total variable cost at 18,000 units = 18,000 × $1.58 = $28,440
Fixed cost = $35,150 – $28,440 = $6,710I’m lost here. Why have they used high low method here. Are we to assume that indirect labor received fixed salary? There is no info about it given in the question. How can they expect us to make such assumption out of nowhere :/
First question:
Although the printed answer is correct, it is confusing kg’s and units in the wording (and so are you in your workings).
If they make 12,000 units, they need 4,800 kg and so the cost is 17,760/4,800 =3,70 per kg.
If they use more that 6,000 kg then there is a discount of 10% and the cost per kg falls to 90% x 3.70 = 3.33 per kg.
Second question:
It is only direct labour that is a truly variable cost (as explained in my lectures).
Also, if. all the labour was variable then the cost per unit would be the same for all production quantities. It isn’t the same and therefore part of the cost must be fixed.
12000 units is assumed to be the fixed budget and rest of the activity levels (15000 and 18000units) are flexible. Am I right? and this is why the answer has used 12000 units in the calculation?
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