Question:

The Cost Sheet of a Company based on a budgeted volume of sales of 3,00,000

units per Quarter is as under:

Rs. Per Unit

Direct Material 5
Direct Wages 2
Factory Overheads (50% fixed) 6
Selling and Administrative overhead (variable) 3
Selling Price 18

When the budget was discussed, it was felt that the company would be able to
achieve only a volume of 2,50,000units of production and sales per
Quarter. The Company therefore decided that an aggressive sales promotion
campaign should be launched to achieve the following improved operations:

Proposal I:

(a) Sell 4,00,000 units per quarter by sending Rs. 2,00,000 on

special advertising.

(b) The factory fixed costs will increase by Rs. 4,00,000 per Quarter.

Proposal II:

(a) Sell 5,00,000 units per Quarter subject to the following conditions.

(b) An overall price reduction of Rs. 2 per units will is allowed on all sales.

(c) Variable Selling and Administration costs will increase by 5.

(d) Direct Material cost reduced by 1% due to purchase price discounts.

(e) The fixed factory costs will increase by Rs.2,00,000 more.

You are required to prepare a Flexible Budget at 2,50,000 units, 4,00,000 units
and 5,00,000 units of output per quarter and calculate the profit at each of the
above levels of output.
Solution:
Particular 2,50,000 4,00,000 5,00,000
units Rs. units Rs. units Rs.
Sales Revenue 45,00,000 72,00,000 8,00,000
Variable Costs:
Direct Material @ Rs.5 12,50,000 20,00,000 24,75,000
Factory Labour @ Rs.2 5,00,000 8,00,000 10,00,000
Factory Overhead @ Rs.
3 7,50,000 12,00,000 15,00,000
Sales and Administrative 2,50,000 4,00,000 5,25,000
Overheads (Variable
cost) @ Rs. 3
Total Variable Cost 27,50,000 44,00,000 55,00,000
Contribution (Sales – 17,50,000 28,00,000 25,00,000
Total Variable Cost)

Fixed Costs: 9,00,000 9,00,000 9,00,000

Factory Overhead
Sales and Administrative 6,00,000 6,00,000 6,00,000
Overhead (Fixed) - 4,00,000 6,00,000
Increase in fixed cost - 2,00,000 -
Advertisement
15,00,000 21,00,000 21,00,000
Total Fixed Cost
2,50,000 7,00,000 4,00,000
Profit (Contribution–
Fixed Cost)

Flexible Budget
Question:
The Managing Director of your company has been given the following
statement showing the result for June 2021.
Master Budget Actual Variance
Unit of produced and 10,000 units Rs. 9,000 units Rs. 1,000 units Rs.
sold
Sales 40,000 Rs. 35,000 Rs. (5,000)
Adverse Rs.
Direct materials 10,000 9,200 800
Direct wages 15,000 13,100 1,900
Variable overhead 5,000 4,700 300
Fixed overhead 5,000 4,900 100
Total cost 35,000 31,000 3,100
Net profit 5,000 3,100 (1900) Adverse
Month ending 30 June 2021
th

The standard cost of product is as follows:

Per Unit Rs.
Direct material (1kg @ Rs.1 per kg) 1
Direct Wages (1 hour @ Rs.1.50) 1.50
Variable overhead (1 hour @ Rs. 0.50) 0.50

Actual results for the month showed that 9,800 kg of material were used and 8,800
labour hours were recorded.
Required:
(a) Prepare a flexible budget for the month and compare with actual results.
(b) Calculate the variances which have arisen.

Solution:
 Statement showing Flexible Budget and its Comparison with Actual
Particulars Master Flexible budget Actual for Variance
Budget 9,000 Rs.
Per unit Rs. For 9,000
For Rs. Units Rs.
10,000
units Rs.
Sales 40,000 4.00 36,000 35,000 1,000(A)
Less: Variable cost:
Direct material 10,000 1 9000 9,200 200(A)
Direct wages 15,000 1.50 13,500 13,100 400(F)
Variable overheads 5,000 0.50 4,700 4,700 200(A)

Total Variable Cost 30,000 3.00 27,000 27,000 -

Contribution (Sales-
Total variable cost) 10,000 1 9,000 8,000 1,000(A)
Less:
Fixed overheads 5,000 0.50 5,000 4,900 100(F)
Net Profit 5,000 0.50 4,000 3,100 900(A)

Question:
A company operates at 50 % of capacity utilization. At this level of operation,
the sales value Rs 9,00,000. At 100% capacity
utilization the following costs and relationships will apply:
Factory Overheads Rs. 1,80,000 (50 Variable)
Factory Cost 60 of Sales
Selling Costs (75 Variable), i.e., 20 of sales
The company anticipates that its sales will increase up to 75% of capacity
utilization. The company also receives a special order from a government
department. This order will occupy 15% of capacity utilization of the plant. The
prime cost in this order is Rs 1,35,000 and the variable selling cost will only be
2% of the sales value offered. Besides, the cost of processing the order is Rs
8,000. The sales price offered is accepted is Rs, 1,45,000.
Required:
Present a statement of profitability at 50% and 75% level of activity.
Evaluate the government order and state whether it is acceptable or not.

Solution:
Particulars 50% of capacity 70% of capacity
Rs. Rs.
Sales 9,00,000 13,50,000
Prime cost 50% of sales 75% of sales 4,50,000 6,75,000
Factory overhead:
Variable cost 45,000 67,500
Fixed cost 90,000 90,000
Factory Cost: (Prime cost + Factory 5,85,000 8,32,500
overheads)
Selling Cost:
Variable Cost 1,35,000 2,02,500
Fixed Cost 90,000 90,000
Total Cost (Factory Cost + Selling 8,10,000 11,25,000
Cost)
Profit (Sales – Total Cost) 90,000 2,25,000

Working Notes:
Sales at 50% = Rs. 9,00,000
Sales at 100% = Rs.18,00,000
Profitability at 100% Capacity
Rs.
Sales 18,00,000
Prime Cost (10,80,000 -1,80,000) 9,00,000 =50% of sales
Factory Overhead 1,80,000 Given
Factory Cost 10,80,000 =60% of sales

Selling Cost 3,60,000 =20% of sales

Total Cost 14,40,000
Profit (Sales-Total Cost) (10,80,000 – 14,40,000) 3,60,000

Evaluation of Government order (15% Capacity)

Sales 1,45,000
Prime Cost 1,35,000
Factory overhead (Variable cost) 13,500
Selling cost variable @ 2% 2,900
Processing cost 8,000
Total Cost 1,59,400
Loss (Sales -Total Cost) Rs.1,440

Hence, not Applicable.