Question 2 (c)
Flexible budget of total cost at 1,40,000 units
12 marks
- Time to write
- About 24 minutes
Question
Question 2 (c) · 12 marksSaturn Electricals Limited's budget manager is preparing a flexible budget for the accounting year that starts on 1st July, 1992.
The company makes one product-DETX II. Direct material costs Rs. 8 per unit. Direct labour averages Rs. 3.00 per hour, and one unit of DETX II requires 1.6 hours. Salesman receive a commission of Rs. 2 for each unit sold. Fixed selling and administrative expenses come to Rs. 90,000 per year.
Manufacturing overhead is estimated at the following amounts for the stated volumes:
| Volume of Production (in units) | 1,20,000 | 1,50,000 |
|---|---|---|
| Expense head | Rs | Rs |
| Indirect material | 2,52,000 | 3,15,000 |
| Indirect labour | 1,50,000 | 1,87,500 |
| Inspection | 84,000 | 1,05,000 |
| Maintenance | 78,000 | 93,000 |
| Supervision | 2,04,000 | 2,40,000 |
| Depreciation - Plant and equipment | 84,000 | 84,000 |
| Engineering services | 98,000 | 98,000 |
| Total manufacturing overhead | 9,50,000 | 11,22,500 |
The normal capacity is 1,25,000 units
At 1,40,000 units of production, prepare a budget of total cost.
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 budgetDraw the format first (heading, columns, dates), then fill in the figures from your working.
Write it in this order
- Read the data; tick every adjustment as you plan it 2 min
- 1 Classification of overheads 4 marks 7 min
- 2 Budget of production cost units 5 marks 8 min
- 3 Selling costs, total cost and note on normal capacity 3 marks 5 min
- Check: every adjustment used, both sides agree, dates in 2 min
Try it first. About 24 minutes for 12 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 overhead
Between 1,20,000 and 1,50,000 units (a change of 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 (₹) | Variable rate per unit (₹) | Fixed part (₹) | Behaviour |
|---|---|---|---|---|---|
| Indirect material | 2,52,000 | 3,15,000 | 2.10 | nil | Variable |
| Indirect labour | 1,50,000 | 1,87,500 | 1.25 | nil | Variable |
| Inspection | 84,000 | 1,05,000 | 0.70 | nil | Variable |
| Maintenance | 78,000 | 93,000 | 0.50 | 18,000 | Semi-variable |
| Supervision | 2,04,000 | 2,40,000 | 1.20 | 60,000 | Semi-variable |
| Depreciation: plant and equipment | 84,000 | 84,000 | nil | 84,000 | Fixed |
| Engineering services | 98,000 | 98,000 | nil | 98,000 | Fixed |
Budget of total cost at 1,40,000 units
| Cost | Behaviour | Basis | Amount (₹) |
|---|---|---|---|
| Direct material | Variable | ₹8 per unit | 11,20,000 |
| Direct labour | Variable | 1.6 hours × ₹3.00 = ₹4.80 per unit | 6,72,000 |
| Indirect material | Variable | ₹2.10 per unit | 2,94,000 |
| Indirect labour | Variable | ₹1.25 per unit | 1,75,000 |
| Inspection | Variable | ₹0.70 per unit | 98,000 |
| Maintenance | Semi-variable | ₹18,000 + ₹0.50 per unit | 88,000 |
| Supervision | Semi-variable | ₹60,000 + ₹1.20 per unit | 2,28,000 |
| Depreciation: plant and equipment | Fixed | 84,000 | |
| Engineering services | Fixed | 98,000 | |
| Total production cost | 28,57,000 |
| Particulars | Behaviour | Amount (₹) |
|---|---|---|
| Total production cost | — | 28,57,000 |
| Salesmen's commission (₹2 × 1,40,000 units, assuming all are sold) | Variable | 2,80,000 |
| Fixed selling and administrative expenses | Fixed | 90,000 |
| Total cost | 32,27,000 |
Manufacturing overhead in this budget is ₹10,65,000, and the total cost per unit is ₹32,27,000 ÷ 1,40,000 = ₹23.05 (rounded).
Normal capacity (1,25,000 units) does not change the budget of total cost, which depends on cost behaviour. It is used to set the fixed manufacturing overhead rate: fixed overheads ₹2,60,000 (₹18,000 + ₹60,000 + ₹84,000 + ₹98,000) ÷ 1,25,000 units = ₹2.08 per unit. At 1,40,000 units this rate would absorb ₹2,91,200, an over-absorption of ₹31,200.
Where the 12 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Classification of overheads | 4 |
| 2 | Budget of production cost at 1,40,000 units | 5 |
| 3 | Selling costs, total cost and note on normal capacity | 3 |
| Total | 12 |
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