ICAN

Cap 2
Budget and Budgetary control

at 100% capacity at 90% capacity at 80% capacity at 50% capacity

Particulars amount amount amount amount amount amount amount amount
a) Variable costs xxx xxx xxx xxx
matrial xx xx xx xx
labour xx xx xx xx
factory OH xx xx xx xx
admin OH xx xx xx xx
selling OH xx xx xx xx
b) fixed costs xxx xx xxx xxx xxx
factory OH xx xx xx xx
admin OH xx xx xx xx
selling OH xx xx xx xx
c)Total cost(a+b) xxx xxx xxx xxx
d)sales xxx xxx xxx xxx
e)Profit(d-c) xxx xxx xxx xxx
f)Contribution(d-a) xxx xxx xxx xxx
 variable
costs
semi variable
costs
fixed costs

Segregation of semi-variable cost into variable and fixed costs

Sales 55,000 units 65,000 units

Total costs 310,000 330,000
Find the total variable cost, total fixed cost and total cost at 70,000 units

𝑺𝒕𝒆𝒑 𝟏 𝑭𝒊𝒏𝒅𝒊𝒏𝒈 𝒗𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝒄𝒐𝒔𝒕 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕

∆ 𝑖𝑛 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡𝑠 330,000 − 310,000 20,000
𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 = = = = 2 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
∆ 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 65,000 − 55,000 10,000
𝑺𝒕𝒆𝒑 𝟐 𝑭𝒊𝒏𝒅𝒊𝒏𝒈 𝒕𝒐𝒕𝒂𝒍 𝒗𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝒄𝒐𝒔𝒕 𝒇𝒐𝒓 𝒂𝒏𝒚 𝒐𝒏𝒆 𝒂𝒄𝒕𝒊𝒗𝒊𝒕𝒚
𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑎𝑡 55,000 𝑢𝑛𝑖𝑡𝑠 = 55,000 ∗ 2 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 = 110,000
𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 − 𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡
𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 = 310,000 − 110,000 = 200,000
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 𝑟𝑒𝑚𝑎𝑖𝑛 𝑓𝑖𝑥𝑒𝑑 𝑓𝑜𝑟 𝑎𝑛𝑦 𝑙𝑒𝑣𝑒𝑙 𝑜𝑓 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦
𝑻𝒐𝒕𝒂𝒍 𝒇𝒊𝒙𝒆𝒅 𝒄𝒐𝒔𝒕 𝒇𝒐𝒓 𝟕𝟎, 𝟎𝟎𝟎 𝒖𝒏𝒊𝒕𝒔 = 𝟐𝟎𝟎, 𝟎𝟎𝟎
𝒂𝒏𝒅 𝒕𝒐𝒕𝒂𝒍 𝒗𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝒄𝒐𝒔𝒕 𝒇𝒐𝒓 𝟕𝟎, 𝟎𝟎𝟎 𝒖𝒏𝒊𝒕𝒔 = 𝟕𝟎, 𝟎𝟎𝟎 × 𝟐 = 𝟏𝟒𝟎, 𝟎𝟎𝟎
𝑡ℎ𝑒𝑟𝑒𝑓𝑜𝑟𝑒 𝑡ℎ𝑒 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑓𝑜𝑟 70,000 𝑢𝑛𝑖𝑡𝑠 𝑖𝑠 200,000 + 140,000 = 3,40,000
1. ABC Ltd. is currently operating at 75% of its capacity. In the past two years, the
levels of operations were 55% and 65% respectively. Presently, the production
is 75,000 units. The company is planning for 85% capacity level during 2022-
23. The cost details are as follows:

55% 65% 75%

(`) (`) (`)

Direct Materials 11,00,000 13,00,000 15,00,000

Direct Labour 5,50,000 6,50,000 7,50,000
Factory Overheads 3,10,000 3,30,000 3,50,000
Selling Overheads 3,20,000 3,60,000 4,00,000
Administrative Overheads 1,60,000 1,60,000 1,60,000
24,40,000 28,00,000 31,60,000

Profit is estimated @ 20% on sales.

The following increases in costs are expected during the year:

Particulars In percentage
Direct Materials 8
Direct Labour 5
Variable Factory Overheads 5
Variable Selling Overheads 8
Fixed Factory Overheads 10
Fixed Selling Overheads 15
Administrative Overheads 10
PREPARE flexible budget for the period 2022-23 at 85% level of capacity. Also
ascertain profit and contribution.
Solution,

1. Identification of the costs

Direct material - variable
Direct labour-variable
Factory Overhead-semi variable
selling overhead-semivariable
admin overhead-fixed

2. Segregation of semi variable costs

a. Factory overhead
∆ 𝑖𝑛 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡𝑠 330,000 − 310,000 20,000
𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 = = =
∆ 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 65,000 − 55,000 10,000
= 2 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑎𝑡 55,000𝑢𝑛𝑖𝑡𝑠 = 55,000 × 2 = 110,000
𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 = 310,000 − 110,000 = 200,000

b. Selling Overhead
∆ 𝑖𝑛 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡𝑠 360,000 − 320,000 40,000
𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 = = =
∆ 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 65,000 − 55,000 10,000
= 4 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑎𝑡 55,000𝑢𝑛𝑖𝑡𝑠 = 55,000 × 4 = 220,000
𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 = 320,000 − 220,000 = 100,000

3. Flexible Budget at 85% capacity

Particulars calculation amount amount

a)variable costs 3,274,200

Direct material 85000*21.6 1,836,000
Direct labour 85000*10.5 892,500
Factory overhead 85000*2.1 178,500
Selling overhead 85000*4.32 367,200
b)fixed overhead 511,000
Factory overhead 200000*110% 220,000
Selling overhead 100000*115% 115,000
Administrative overhead 160000*110% 176,000
c) total costs 3,785,200
d)sales(cost +profit) 4,731,500
e)profit(20% 0n sales=25% 0n 25% of 946300
costs) 3785,200
f)contribution(d-a) 1,457,300
Calculation of variable cost per unit

Particulars Original cost per unit Revised cost per unit

Direct material 11,00,000/55,000 =20 20+8% of 20=21.6

Direct labour 550,000/55000=10 10+5% of 10=10.5
variable Factory overhead 2 2+5% 0f 2=2.1
variable Selling overhead 4 4+8% 0f 4=4.32