Home » Explanations » Management Accounting » Flexible Budget Practical

Problems and Solutions

Flexible Budget Practical Problems

and Solutions
Written by True Tamplin, BSc, CEPF®

Updated on September 17, 2021

Problem 1
Using the following information, prepare a flexible budget for the

production of 80% and 100% activity.

Production at 50% Capacity 5,000 Units

Raw Materials $80 per unit

Direct Labor $50 per unit

Direct Expenses $15 per unit

Factory Expenses $50,000 (50) (Fixed)

Administration Expenses $60,000 (Variable)

Solution

Flexible Budget at a Capacity of

Capacity of 50% 80% 100%

Output Units 5,000 8,000 10,000

$ $ $

Raw Materials 4,00,000 6,40,000 8,00,000

Labor 2,50,000 40,000 50,000

Direct Expenses 75,000 1,20,000 1,50,000

Prime Cost 7,25,000 11,60,000 14,50,000

Factory Expenses 50%

25,000 40,000 50,000
Fixed (50,000)

Factory Cost 7,75,000 12,25,000 15,25,000

Admin Expenses 40% Fixed

24,000 24,000 24,000
(60,000)

Variable 60% 36,000 57,600 72,000

Total Cost 8,35,000 13,06,000 16,21,000

Problem 2
The following data is available in a manufacturing company for a yearly

period.

Fixed Expenses

Wages and Salaries 9,50,000

Rent/Rates and Taxes 6,60,000

Depreciation 7,40,000

Sundry Admin Expenses 6,50,000

Semi-variable Expenses at 50% Capacity

Maintenance and Repairs 3,50,000

Indirect Labor 7,90,000

Sales Department Salaries, etc. 3,80,000

Sundry Admin Salaries 2,80,000

Variable Expenses

Materials 21,70,000

Labor 20,40,000

Other Expenses 7,90,000

Total 98,00,000
You should assume that the fixed expenses remain constant for all

levels of production.

Semi-variable expenses remain constant between 45% and 65%

capacity, increasing by 10% between 65% and 80% capacity, and by 20%

between 80% and 100% capacity.

The sales at various levels of capacity are the following:

50% Capacity 100

60% Capacity 120

75% Capacity 150

90% Capacity 180

100% Capacity 200

For this task, prepare a flexible budget for the year and forecast the

profit at 60%, 75%, 90%, and 100% capacity.

Solution

Flexible Budget

50% ($) 60% ($) 75% ($) 90% ($) 100% ($)

(A)

Variable
Expenses

Material 21,70,000 26,04,000 32,55,000 39,06,000 43,40,000

Labor 20,40,000 24,48,000 50,60,000 36,72,000 40,80,000

Other
7,90,000 9,48,000 11,85,000 14,22,000 15,80,000
Expenses

Semi-

variable

Expenses

Maintenance
3,50,000 3,50,000 3,85,000 4,20,000 4,20,000
and Repairs

Indirect
7,90,000 7,90,000 8,69,000 9,48,000 9,48,000
labor

Sales

Department 3,80,000 3,80,000 4,18,000 4,56,000 4,56,000

Salaries

Sundry
2,80,000 2,80,000 3,08,000 3,36,000 3,36,000
Expenses

Fixed

Expenses

Wages and
9,50,000 9,50,000 9,50,000 9,50,000 9,50,000
Salaries

Rent/Rates
6,60,000 6,60,000 6,60,000 6,60,000 6,60,000
and Taxes

Depreciation 7,40,000 7,40,000 7,40,000 7,40,000 7,40,000

Sundry
6,50,000 6,50,000 6,50,000 6,50,000 6,50,000
Admin
Total Cost 98,00,000 108,00,000 124,00,000 141,60,000 152,60,000

(A)

Sales (B) 100,00,000 120,00,000 150,00,000 180,00,000 200,00,000

Profit (A –
2,00,000 12,00,000 25,20,000 38,40,000 47,40,000
B)

Problem 3
A factory is currently working at 50% capacity and produces 10,000

units. Estimate the profits of the company when the factory works at

60% and 80% capacity, and offer your critical comments.

At 50% capacity, the cost of working raw materials increases by 2% and

the selling price falls by 2%.

At 80% capacity, the working raw materials cost increases by 5% and

selling price falls by 5%.

Additionally, at 50% capacity, working the product costs $180 per unit

and it is sold at $200 per unit.

The unit cost of $180 consists of the following:

Material: $100

Labor: $30

Factory overhead: $30 (40% fixed)

Admin overhead: $20 (50% fixed)

Solution

Output: 10,000 Output: 12,000 Output: 16,000

units (50% units (60% units (80%

capacity) capacity) capacity)

Per Per unit Per

Total ($) Total ($) Total ($)
unit ($) ($) unit ($)

Sales Value 200 20,00,000 196 23,52,000 190 30,40,000

Material
100 10,00,000 102 12,24,000 105 16,80,000
Cost

Labor Cost 30 3,00,000 30 3,60,000 30 4,80,000

Variable

Factory 18 1,80,000 18 2,16,000 18 2,88,000

Overhead

Fixed
Factory 12 1,20,000 10 1,20,000 7.50 1,20,000

Overhead

Variable

Admin 10 1,00,000 10 120,000 10 1,60,000

Overhead

Fixed OH 10 1,00,000 8.33 1,00,000 6.25 1,00,000

Total Cost 180 18,00,000 178.33 21,40,000 176.25 28,28,000

Profit 20 2,00,000 17.67 2,12,000 13.25 2,12,000

Frequently Asked Questions
What are the limitations of flexible budgeting?

There are many limitations, but some of the main ones include; it only

works if the assumption holds, if there is an increase in production, it

can place excess burdens on current staff and create more work for

them until demand falls again, etc.

What is a flexible budget?

A flexible budget is a tool used in the preparation of financial

statements. It allows companies to prepare budgets under different

scenarios to be adjusted for future projections.

What are the advantages of flexible budgets?

They allow managers to predict the effect that changes will have on
their company's income statement and balance sheet while still being

able to reflect actual figures. It helps to provide accurate forecasts

without using theoretical data since they are based on what occurred.

What is the flexible budget formula?

It is [(actual output quantity * actual input price) – (actual input quantity

* actual input price)] all divided by actual input price.

What is the difference between a flexible budget and an

actual budget?
Flexible budgets are created to reflect different scenarios to be adjusted

in response to changes in an organization's environment, while actual

budgets are based on accurate figures used for planning purposes or

even forecasting future earnings.

Related Posts

Factory Overhead: Practical Problems and Solutions

Methods of Factory Overhead Absorption

Marginal Costing: Practical Questions and Solutions

Marginal Costing

Overhead Absorption

About the Author

True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital,

and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of

the Society for Advancing Business Editing and Writing, contributes to

his financial education site, Finance Strategists, and has spoken to

various financial communities such as the CFA Institute, as well as

university students like his Alma mater, Biola University, where he

received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author

profile on Amazon, his interview on CBS, or check out his speaker

profile on the CFA Institute website.

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