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Flexible Budgeting Mc Ginley manufactures a component for the motor industry - Leaving Cert Accounting - Question 9 - 2006
Question 9
Flexible Budgeting Mc Ginley manufactures a component for the motor industry. The following flexible budgets have already been prepared for 50%, 75% and 85% of the ... show full transcript
Worked Solution & Example Answer:Flexible Budgeting Mc Ginley manufactures a component for the motor industry - Leaving Cert Accounting - Question 9 - 2006
Step 1
Classify the above costs into fixed, variable and mixed costs.
Answer
The costs can be classified as follows:
- Direct materials: Variable Cost (changes with production level)
- Direct wages: Variable Cost (depends on hours worked)
- Production overheads: Mixed Cost (contains fixed and variable components)
- Other overhead costs: Fixed Cost (remains constant regardless of production)
- Administration expenses: Fixed Cost (does not change with production levels)
Step 2
Separate production overheads into fixed and variable elements.
Answer
To separate production overheads:
- Calculate the variable component. This can be done by using the high-low method:
- High: 15,000 units = €108,000
- Low: 10,000 units = €73,000
- Difference in cost = €108,000 - €73,000 = €35,000
- Difference in units = 15,000 - 10,000 = 5,000 units
- Variable cost per unit = €35,000 / 5,000 = €7 per unit
- Total Variable Cost (for 19,000 units) = 19,000 * €7 = €133,000
Hence, the remaining part of the total costs relates to fixed overheads:
-
Fixed Overheads = Total Cost - Total Variable Cost = €122,000 - €133,000 = -€11,000 (This indicates adjustment needed on the flexible budget)
-
Therefore, Production Overheads consist of Variable and Fixed Costs.
Step 3
Separate other overhead costs into fixed and variable elements.
Answer
Following the same methodology:
- The variable component over 7,000 units is calculated as:
- High: €54,000 (21,000 units)
- Low: €39,000 (17,000 units)
- Difference = €54,000 - €39,000 = €15,000
- Difference in units = 21,000 - 17,000 = 4,000 units
- Variable cost per unit = €15,000 / 4,000 = €3.75 per unit
To determine total variable cost for 19,000 units:
- Total Variable Cost = 19,000 * €3.75 = €71,250
Remaining fixed cost:
- Total Fixed Cost = Total Overhead Costs - Total Variable Cost
- This indicates how fixed and variable components are to be allocated.
Step 4
Prepare a flexible budget for 95% activity level.
Answer
To prepare the flexible budget:
At 95% activity level, assuming a production output of 19,000 units:
| Cost Component | Calculation | Total (€) |
|---|---|---|
| Direct Materials | 19,000 x 14 | 266,000 |
| Direct Wages | 19,000 x 11 | 209,000 |
| Production Overheads | Variable + Fixed (from earlier calculations) | 136,000 |
| Other Overheads | Fixed (from earlier) | 66,000 |
| Administration Expenses | Fixed | 28,000 |
| Total Cost | 705,000 |
Step 5
Restate the budget, using marginal costing principles, and show the contribution.
Answer
Using marginal costing:
- Sales = 19,000 units at selling price to achieve 24% profit
- Calculate Contribution:
| Description | Amount (€) |
|---|---|
| Sales | 927,632 |
| Less Variable Costs | 133,000 + 266,000 + 209,000 |
| Contribution | 927,632 - 608,000 |
| Less Fixed Costs | 3,000 (production) + 28,000 |
| Profit | 319,632 - 31,000 |
Step 6
What is an adverse variance? State why adverse variances may arise in Direct material costs.
Answer
An adverse variance occurs when actual costs exceed budgeted costs. This can result from various factors such as:
- Increased material prices: If the cost of raw materials rises unexpectedly, it results in higher spending than the budgeted amount.
- Inefficient use of materials: Over/under usage or wastage can lead to adverse variances, where more materials are needed than originally planned.
Step 7
Explain, with examples, 'controllable' and 'uncontrollable' costs.
Answer
Controllable costs are expenses that can be managed directly by a manager; for example, a manager can control the usage of materials or manpower based on need and can make adjustments accordingly.
- Example of Controllable Costs: Variable production costs, such as direct materials used in manufacturing.
On the other hand, uncontrollable costs are expenses that a manager cannot influence; these are typically fixed costs or commitments that incur regardless of the business activity.
- Example of Uncontrollable Costs: Lease payments for a factory space or fixed salaries of permanent staff, as these do not vary with production levels.