Past Year Questions - Flexible budgets

Q1. The Jaya Electronic Sdn Bhd manufacture only one product, which passes through
three departments. A study has been made by the cost accountant in consultation with
engineers, technicians and other production experts of the variability of overheads.
Each item was carefully analysed and the results of the normal level of activity at
5,000 machine-hour are summarised as follows:

RM RM
Overheads Fixed amount Variable rate per machine-hour
Indirect material 2,200 0.20
Supervision and inspection 8,400 —
Indirect labour 1,300 0.40
Repairs and maintenance 2,000 0.30
Power, heat and light 4,000 1.20
Water 1,500 0.10
Telephone 1,400 0.10
Insurance 2,500 —
Depreciation 9,200 —
Miscellaneous 400 0.10
32,900 2.40

Machine hour rate at normal level of activity:

Fixed (RM 32,900 ÷ 5,000 hours) 6.58
Variable 2.40
Total 8.98

The study has estimated the following results for a level of activity of 7,000 machine-
hours:
1. Indirect labour will increase by RM 850.
2. Increased supervision will be needed at a cost of RM 1,250.
3. Increased maintenance and repairs are estimated at RM 450.
4. Machinery will depreciate more rapidly than estimated at the normal level of
activity to the extent of RM 1,100.
5. Overtime will cost RM 2,800.

Required:

(a) Prepare a flexible budget at 4,000, 5,000, 6,000 and 7,000 machine-hours and
also determine the machine-hour rate at these levels. (12 marks )
(b) Compare and contrast Static budget with Flexible budget. Explain the
advantages of Flexible budget. (8 marks)
[Total 20 marks]
Q2. Satu Motors Sdn Bhd had prepared fixed and flexible budget for the financial year
2017 as follow:
Fixed budget for full Flexible budget for 80%
capacity (RM) level (RM)
Sales 1,500,000 1,200,000
Direct materials 600,000 480,000
Direct labour 250,000 200,000
Variable overheads 235,000 188,000
Semi-variable overhead 343,250 310,250
Profit 71,750 21,750

After the closing of the financial year 2017, total actual sales stood at RM1,319,500
and there was a favourable sales price variance of RM14,500 (F).
Required:

(a) Prepare a flexible budget for the actual level of sales. (13 marks)

(b) Briefly explain the following terms giving an example in each case:
(i) Incremental cost (3 marks)
(ii) Avoidable and unavoidable costs (4 marks)
[Total 20 marks]
Flexible budget – Answers

Q1. (a)
Department 2: flexible budget
Overheads Level of activity in machine-hours
4,000*** 5,000*** 6,000*** 7,000***
Indirect material RM 3,000 RM 3,200 RM 3,400 RM 3,600
Supervision and inspection 8,400 8,400 8,400 9,650
Indirect labour 2,900 3,300 3,700 4,950
Repairs and maintenance 3,200 3,500 3,800 4,550
Power, heat and light 8,800 10,000 11,200 12,400
Water 1,900 2,000 2,100 2,200
Telephone 1,800 1,900 2,000 2,100
Insurance 2,500 2,500 2,500 2,500
Depreciation 9,200 9,200 9,200 10,300
Overtime cost — — — 2,800
Miscellaneous 800 900 1,000 1,100
42,500 44,900 47,300 56,150
Machine-hour rate 10.625 8.98 7.88 8.02

(a) Static * Flexible*

Planned at a single level of output√ Planned on the actual or various levels of output√
Planned at the start of the budget period√ Planned after the actual level of output is known√
Performance evaluation is difficult when Performance evaluation is more meaningful
actual activity differs from the planned when compare the planned with actual at the
level of activity. √ √ same level of activity. √√

Advantages of Flexible budgeting: ***

1) Show the revenues and expenses that should have occurred at the actual level of
activity.*
2) Prepared for any activity level within the relevant range
3) Reveal variances due to good cost control or lack of cost control*
4) Improve the performance evaluation. *

Q2 Calculation of actual sales at Budgeted prices

RM
Actual Sales at Actual Price 1,319,500
Less: Sales price variance (F) 14,500*
Actual sales at budgeted prices 1,305,000

Activity level = Actual sales at budgeted prices X 100%

Budgeted sales at full capacity

= RM1,305,000 X 100%
RM1,500,000

= 87.0%*
 Segregation of Fixed and variable cost element from semi-variable overheads

Variable overhead = Overhead full capacity – overhead 80% capacity

Difference activity level

= RM343,250 – RM310,250*
20
= RM1,650*

Fixed overhead = Total other overheads at 100% level – variable

overheads at 100%
= RM343,250 – (RM1,650 x 100)*

= RM178,250*

Flexible budget at 87.0 Activity level

Amount (RM)
Sales 1,305,000*
Less:
Direct materials 522,000*
Direct labour 217,500*
Variable overheads (RM235,000 X 87.0%) 204,450*
Semi-variable overheads
Variable cost (RM1,650 X 87.0% x100) 143,550*
Fixed cost 178,250*
Profit 39,250*
(Total 13 marks)
(b) Briefly describe the following terms giving an example in each case:
(i) Incremental cost

(ii) Avoidable and unavoidable costs

Answer:

(i) Incremental cost

An incremental cost is the additional cost that will occur if a particular
decision is taken. Provided that this additional cost is cash flow. (2 marks)

Example:
To produce 1,000 units, a company incurred variable cost of RM1.2million. at
a normal capacity of 2,000 units, fixed costs incurred was RM0.6m. The
incremental cost of making one extra unit would be RM1,200 and it would not
affect the fixed costs. (1 mark)

(ii) Avoidable and unavoidable costs

An avoidable cost could be saved (avoided), depending whether or not a
particular decision is taken. An unavoidable cost is a cost that will be incurred
anyway. (2 marks)

Example:
A company is paying RM0.5m annually for a warehouse on a short term lease
and incurring an annual cost of RM0.4m on maintenance and security of the
warehouse. One year of the lease is remaining and the warehouse is now more
required. (1 mark)

The rental cost of the warehouse is unavoidable cost; therefore, it should be

ignored while taking any decision. However, by closing down the warehouse
the company can avoid annual maintenance and security cost of RM0.4
million (1 mark)