POLITEKNIK KOTA BAHRU

COMMERCE DEPARTMENT

SESSION: I: 2022/2023

TOPIC 6 : BUDGET FOR PLANNING AND CONTROL

DPA20193 : BASIC COST ACCOUNTING

NAMA 1.NUR ASYIKIN BINTI SAMSUDI

& (04DPM20F2073)
2. MAHIRAH BT MAHADI
NO.PENDAFTARAN
(04DPM20F2069)
3.ADLIN FITRSIYA BINT AZNI
(04DPM20F2089)

KELAS DPM4D

NAMA PENSYARAH PN.EJANATI BINTI ABD HALIM @ ABU HALIM

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TABLE OF CONTENT

NO. CONTENT PAGE

1 Introduction 3

2 Example 1 4-6
1.1. Solution 1

3 Example 2 7-10
1.2 Solution 2
1.3 Solution 3

4 Conclusion 11

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 INTRODUCTION

A flexible budget is a budget that adjusts or flexes with changes in volume or activity. The
flexible budget is more sophisticated and useful than a static budget. (The static budget amounts
do not change. They remain unchanged from the amounts established at the time that the static
budget was prepared and approved.)
For costs that vary with volume or activity, the flexible budget will flex because the budget will
include a variable rate per unit of activity instead of one fixed total amount. In short, the flexible
budget is a more useful tool when measuring a manager's efficiency.
Advantages of a flexible budget
1. Planning tool
The most obvious purpose of a budget is to quantify a plan of action. A good action plan will
help the company to achieve a higher level of performance. The budgeting process forces the
organization's management to plan ahead. It is necessary for managers to plan for future
operations, and in the process, consider how conditions in their company might change, and the
steps they should take to respond to these changed conditions.
2. Communication tool for the whole organization
Everyone in an organization must have a clear understanding of the part they are expected to
achieve from the annual budget. This process will ensure that the appropriate individuals are
made accountable to implement the budget. Through the budget, top management will
communicate their expectations to lower level management. Thus, everyone will know the
direction the organization wants to take, and to strive for the achievement of the company.
3. Resource allocation tool
Resource allocation is the process of assigning and managing assets or resources, in a manner
that supports an organization's strategic goals. Generally, an organization's resources are limited,
and budgets provide one means of allocating resources among competing uses. This means only
a limited amount of cash is available to invest in fixed assets and working capital. Thus, the
budgeting process will force management to decide which assets are most profitable to invest in.
4. Performance measurement tool
Budgets can provide a basis for performance evaluation. They are an integral part of the
procedures for controlling and reviewing, which can be used to establish agreed targets to be
achieved, and any performance to be monitored. Performance is often evaluated by measuring
success against the budgets. It can provide a useful guide to managers, on how to evaluate targets
that they have previously helped to set.

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EXAMPLE FLEXIBLE BUDGET 1

Megah Holding had decided to use a flexible budget in order to manage their performance
achievement with more accuracy. The following is the information from the company year 2020:

a) The budget unit at 50% is 15,000 units.

b) Selling price forfc budget per unit is RM 40 and actual selling price per unit is RM 35

Here is the information on the budgeted cost at 60% and 70%

Capacity of Output Units 60% 70%
(RM) (RM)
Raw Material 162,000 189,000
Labor 126,000 147,000
Adminstrative expenses 90,000 105,000
Manufacturing overhead 145,000 155,050
Other operating Expenses 54,000 63,000

The actual cost of company for the year ended 2020 are as follows :
Capacity of Output Units 90%
(RM)
Raw Material 224,100

Labor 171,990

Adminstrative expenses 129,000

Manufacturing overhead(Including fixed 154,000
manufacturing overhead RM 46,000)
Other operating expenses 99,900

You are required to prepare:

a) Flexible budget for 76% and 98% level of production.
b) Performance report for the year ended 2020.
1.1 : SOLUTION 1
Calculation of Units :

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15,000
50% = 30,000 x percent of units

50% = 15,000 unit

60%= 18,000 unit
70%= 21,000 unit
76%= 22,800 unit
90%= 27,000 unit
98%= 29,400 unit

Semi variable cost :

MANUFACTURING OVERHEAD

Variable cost per unit = Difference of cost

Difference of units

= 155,050 – 145,000
21,000 – 18,000

= 10,050
3,000 = RM 3.35 per unit

Fixed cost = Total cost for highest point – ( Variable rate x Highest ouput )

= 155,050 – ( RM 3.35 X 21,000 )

= 155,050 – 70,350
= RM 84,700

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 a) Flexible budget for 76%, 90% and 98% level of production.

UNIT PRICE 76%= 22,800 90% = 27,000 98%= 29,400

Units Units Units
RM RM RM RM
Sales 40 912,000 1,080,000 1,176,000
Raw Material 9 205,200 243,000 246,600
Labor 7 159,600 189,000 205,800
Administrative 5 114,000 135,000 147,000
expenses
Variable 3.35 76,380 90,450 98,490
manufacturing
overhead
Other expenses 3 68,400 81,000 88,200
Cost margin 288,420 341,550 611,910
Fixed 84,700 84,700 84,700
manufacturing
overhead
Net profit 203,720 256,850 527,210

b) Performance report for the year ended 2020.

90% = 27,000 units 90% = 27,000 units Variance
Budget Actual
RM RM RM
Sales 1,080,000 945,000 135,000 ( A)
Raw material 243,000 224,100 18,900 (F)
Labor 189,000 171,990 17,010 (F)
Administrative 1135,000 129,000 6,000 (F)
overhead
Variable 90,450 108,000 17,550 (A)
manufacturing
Overhead
Other expenses 81,000 99,900 18,900 (F)
Fixed manufacturing 84,700 46,000 38,700 (F)
overhead
Net profit 256,850 166,010 90,840 (A)

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EXAMPLE FLEXIBLE BUDGET 2

Using the following information, prepare a flexible budget for the production of 60% and
80% activity.

Production at 40% capacity 4,000 units

Raw materials 60 per unit
Direct labour 50 per units
Direct expenses 10 per units
Production overhead 30 unit [rm36000]
Administration overhead 50,000
Selling and distribution overhead 45,000

SOLUTION 2

Item Cost per 40% 60% 80%

unit 4000 6000 8000
1600 3600 6400

Direct material 60 96 000 216 000 384 000

Direct labour 50 80 000 180 000 320 000
Direct expenses 10 16 000 36 000 64 000
Production overhead 12000 19 20000 432 0000 960 0000
Administration 12.5 20 000 45 000 80 000
overhead
Selling and 11.25 18 000 40 500 72 0000
distribution overhead

Total cost 215 0000 483 7500 1116 8000

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EXAMPLE FLEXIBLE BUDGET 3

EL-Rah Suria Bhd has decided to use a flexible budget in order to manage their performance
achievement with more accuracy.The following information consists of the company year 2020
budgeted costs at 60% and 75% level of production.It was given that at 60% level of
production,the total output is 30,000 units.

BUDGET
Level Of UNIT 60% 75%
Production % PRICE
RM RM RM
Raw material 2.50 75,000 93,750
Labour 3.00 90,000 112,500
Overheads 1.00 30,000 37,500
Electricity and water 0.30 9,000 11,250
Royalty 8,900 11,000
Commission 13,000 16,000
Supervision 11,000 11,000
Depriciation 20,500 20,500

Additional information:
-Budgeted selling price per unit is RM 11.00
Required :
Prepare a flexible budget for 80% and 95% level of production according to the fixed,variable
and semi-variable costs information.

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SOLUTION 3
Calculation of Units :
30,000 unit / 60% = 500 unit
1% = 500 unit
60 % = 30,000 unit
75% = 37,500 unit
80% = 40,000 unit
95% = 47,500 unit

Semi variable cost :

i ) Royalty
Variable cost per unit = Difference of cost
Difference of units

= 11,000 - 8,900
37,500 - 30,000
= 2,100
7500
= RM 0.28

Fixed cost = Total cost for highest point – ( Variable rate x Highest ouput )

= 11,000 - ( RM 0.28 x 37,500 )

= RM 500
ii) Commission
Variable cost per unit = Difference of cost
Difference of units

= 16,000 - 13,000
37,500 - 30,000

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 = 3,000
7500
= RM 0.40

Fixed cost = Total cost for highest point – ( Variable rate x Highest ouput )

= 16,000 - ( RM 0.40 x 37,500 )

= RM 1,000
Flexible budget for 80% and 95% level of production :

Level Of 80% 95%

Production %
UNIT PRICE 40,000 Unit 47,500 Unit

Sale 11.00 440,000 522,500

Raw material 2.50 100,000 118,750
Labour 3.00 120,000 142,500
Overheads 1.00 40,000 47,500
Electricity and water 0.30 12,000 14,250
Royalty 0.28 11,200 13,300
Fixed Royalty 500 500 500
Commission 0.40 16,000 19,000
Fixed Commission 1,000 1,000 1,000
Supervision 11,000 11,000 11,000
Depriciation 20,500 20,500 20,500
TOTAL COST - 332,200 388,300
NET PROFIT - 107,800 134,200

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 CONCLUSION

A flexible budget can be found suitable when the business conditions are constantly changing.
Accurate estimates are expected from if the resources are available with the experts. A big
organization should hire experts to prepare a flexible budget and to help their organization make
a clear vision about what output should be produced to achieve the targeted profit.

A flexible budget is useful for manufacturing industries where costs change with a change in
activity level. To make accurate budgets, companies must involve experts so that there is less
scope for error and variance analysis is improved.

In conclusion, the budget that companies can prepare for multiple output levels is a Flexible
Budget. Practically, managers widely use this type of budget as it is the most realistic one.

Besides, it provides guidelines and a base for comparing actual and budgeted costs

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 APPENDIX 1

References :

1. By wallstreetMojo
https://www.wallstreetmojo.com/flexible-budget/

2. https://learn.financestrategists.com/explanation/management-accounting/flexible-budget-
practical-problems-and-solutions/

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