Question 2 OR
Flexible budget of production cost at 1,40,000 units, with the behaviour of each cost
18 marks
- Time to write
- About 36 minutes
Question
Question 2 OR · 18 marksA company's Budget Manager is preparing a flexible budget for the accounting year ahead. The company makes a single product, and the following information is provided:
Direct material costs Rs.26 per unit. Direct labour averages Rs.12.00 per hour, and one unit of the product requires 1.60 hours. Salesmen receive a commission of Rs.4 for each unit sold.
Fixed selling and administration expenses come to Rs.3,60,000 per year.
Manufacturing overheads have been estimated at the following amounts under the given conditions of volume:
| Expense | At 1,20,000 units(Rs.) | At 1,50,000 units(Rs.) |
|---|---|---|
| Indirect materials | 2,88,000 | 3,60,000 |
| Indirect labour | 1,50,000 | 1,87,500 |
| Inspection | 96,000 | 1,20,000 |
| Maintenance | 75,000 | 90,000 |
| Supervision | 1,92,000 | 2,25,000 |
| Depreciation-Plant & Equipment | 96,000 | 96,000 |
| Engineering services | 96,000 | 96,000 |
| Total Manufacturing Overheads | 9,93,000 | 11,74,500 |
At a production level of 1,40,000 units, prepare a total production cost budget, stating clearly how each cost behaves in relation to output.
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- prepare a total production cost budgetDraw the format first (heading, columns, dates), then fill in the figures from your working.
What the paper leaves open
No marks are printed against this alternative; it is reckoned at 18 (Q2 (a) and (b) carry 4 + 14, and all questions carry equal marks in a 90-mark paper).
Write it in this order
- Read the data; tick every adjustment as you plan it 2 min
- 1 Classification of each overhead as variable, semi-variable or fixed 6 marks 11 min
- 2 Flexible budget of production cost units 9 marks 16 min
- 3 Selling and administration costs and total cost 3 marks 5 min
- Check: every adjustment used, both sides agree, dates in 2 min
Short on time? Step 2 carries 9 of the 18 marks: guard its minutes.
Try it first. About 36 minutes for 18 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Working: behaviour of each manufacturing overhead
The two levels differ by 1,50,000 − 1,20,000 = 30,000 units. Variable rate = change in cost ÷ 30,000; fixed part = cost at 1,20,000 units − 1,20,000 × variable rate.
| Overhead | At 1,20,000 units (₹) | At 1,50,000 units (₹) | Change (₹) | Variable rate per unit (₹) | Fixed part (₹) | Behaviour |
|---|---|---|---|---|---|---|
| Indirect materials | 2,88,000 | 3,60,000 | 72,000 | 2.40 | nil | Variable |
| Indirect labour | 1,50,000 | 1,87,500 | 37,500 | 1.25 | nil | Variable |
| Inspection | 96,000 | 1,20,000 | 24,000 | 0.80 | nil | Variable |
| Maintenance | 75,000 | 90,000 | 15,000 | 0.50 | 15,000 | Semi-variable |
| Supervision | 1,92,000 | 2,25,000 | 33,000 | 1.10 | 60,000 | Semi-variable |
| Depreciation: plant and equipment | 96,000 | 96,000 | nil | nil | 96,000 | Fixed |
| Engineering services | 96,000 | 96,000 | nil | nil | 96,000 | Fixed |
Flexible budget at 1,40,000 units (total production cost)
| Cost | Behaviour | Basis | Amount at 1,40,000 units (₹) |
|---|---|---|---|
| Direct material | Variable | ₹26 per unit | 36,40,000 |
| Direct labour | Variable | 1.60 hours × ₹12.00 = ₹19.20 per unit | 26,88,000 |
| Indirect materials | Variable | ₹2.40 per unit | 3,36,000 |
| Indirect labour | Variable | ₹1.25 per unit | 1,75,000 |
| Inspection | Variable | ₹0.80 per unit | 1,12,000 |
| Maintenance | Semi-variable | ₹15,000 + ₹0.50 per unit | 85,000 |
| Supervision | Semi-variable | ₹60,000 + ₹1.10 per unit | 2,14,000 |
| Depreciation: plant and equipment | Fixed | Same at every level | 96,000 |
| Engineering services | Fixed | Same at every level | 96,000 |
| Total production cost | 74,42,000 |
Manufacturing overheads within this budget total ₹11,14,000 (between ₹9,93,000 at 1,20,000 units and ₹11,74,500 at 1,50,000 units). Production cost per unit = ₹74,42,000 ÷ 1,40,000 = ₹53.16 (rounded).
Selling and administration costs
The question gives selling and administration costs as well. If the 1,40,000 units are also sold, the total cost becomes:
| Particulars | Behaviour | Amount (₹) |
|---|---|---|
| Total production cost (above) | — | 74,42,000 |
| Salesmen's commission (₹4 × 1,40,000) | Variable | 5,60,000 |
| Fixed selling and administration expenses | Fixed | 3,60,000 |
| Total cost | 83,62,000 |
Where the 18 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Classification of each overhead as variable, semi-variable or fixed | 6 |
| 2 | Flexible budget of production cost at 1,40,000 units | 9 |
| 3 | Selling and administration costs and total cost | 3 |
| Total | 18 |
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