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Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:SID Product Bhd (SPB) is a manufacturer operating in Kuantan, Pahang. It produces variety of
household products for the local and overseas market. FIB is currently operating below its full
capacity due to the Covid 19 Pandemic. The slow recovery of the global economy is affecting
its future operation. FIB is operating at 70% of its capacity, which represent 140,000 units of its
products. The different mixtures of its products will not affect the proportion of the resources
used by FIB.
The flexed budgets for the current year are as follows:
Capacity level (units)
100,000
120,000
140,000
RM
RM
RM
Direct materials
1,800,000
2,160,000
2,520,000
Direct labour
2,620,000
3,120,000
3,620,000
Production overhead
1,300,000
1,510,000
1,720,000
Selling & distribution overhead
2,206,000
2,606,000
3,006,000
Administrative overhead
1,500,000
1,500,000
1,500,000
Total costs
9,426,000
10,896,000
12,366,000
The Managing Director of SPB expects the global economy will pick up, which will mean better
prospect for next year. He has requested the management accountant to prepare a budget if
FIB operates at 180,000 units. The following information should be taken into consideration:
1. Material costs will increase by 5% next year.
2. RM120,000 of direct labour costs is the fixed salary for the production manager which will
increase by 7% next year. Other labour rate will remain the same.
3. Production overhead and selling and administrative overhead are semi-variable costs.
4. A warehouse rented at RM36,000 per annum will not be needed next year due to the policy
of inventory reduction to reduce production cost. This rental is included in the selling and
distribution overhead.
Required:
(a)
Prepare a flexible budget for next year based on forecasted activity of 180,000 units
(b)
Discuss on the effectiveness of participation in the budgeting process.
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