Chapter 23, Problem 1APSA

To determine

Classification of items into fixed or variable:

A fixed or static budget is a budget that do not tend to change with changes in volume or production while flexible budget is a budget that tends to change with change in volume or production.

Classification of items into fixed or variable cost and to determine their per unit amount or annual amount, as the case may be.

Explanation of Solution

Company P Fixed Budget Report For Year Ended December, 31
Particulars	Cost classification	Variable costper unit	Total variable cost($)	Fixed cost($)
Sales	Variable	200	3,000,000	-
Cost of good sold
Direct materials	Variable	65	975,000	-
Direct labour	Variable	15	225,000	-
Machinery repairs	Variable	4	60,000	-
Depreciation	Fixed	-	-	300,000
Utilities	Variable	3	45,000	150,000
Plant management salaries	Fixed	-	-	200,000
Selling expense
Packaging	Variable	5	75,000	-
Shipping	Variable	7	105,000	-
Sales salary	Fixed	-	-	250,000
General and administrative expense
Advertising expense	Fixed	-	-	125,000
Salaries	Fixed	-	-	241,000
Entertainment expense	Fixed	-	-	90,000
Total cost			1,485,000	1,356,000

To determine

Flexible budget:

A flexible budget is a budget that tends to change with change in volume or production. Flexible budget is more useful than fixed budget as it reflects the cost in proportionate to the level of activity.

Preparation of flexible budget at sales volume of 14,000 and 16,000 units.

Explanation of Solution

Company P Flexible Budget Report For Year Ended December, 31
Particulars	Variable cost per unit	Total fixed cost	Flexible budget for
			14,000 units	16,000 units
Sales	200.00		2,800,000	3,200,000
Variable costs
Direct materials	65.00		910,000	1,040,000
Direct labour	15.00		210,000	240,000
Machinery repairs	4.00		56,000	64,000
Packaging	5.00		70,000	80,000
Utilities	3.00		42,000	48,000
Shipping	7.00		98,000	112,000
Total variable costs	99.00		1,386,000	1,584,000
Contribution margin	101.00		1,414,000	1,616,000
Fixed costs
Depreciation		300,000	300,000	300,000
Utilities		150,000	150,000	150,000
Plant management salaries		200,000	200,000	200,000
Sales salary	-	250,000	250,000	250,000
Advertising expense	-	125,000	125,000	125,000
Salaries	-	241,000	241,000	241,000
Entertainment expense	-	90,000	90,000	90,000
Total fixed cost			1,356,000	1,356,000
Income from operations			58,000	260,000

To determine

Flexible budget:

A flexible budget is a budget that tends to change with change in volume or production. Flexible budget is more useful than fixed budget as it reflects the cost in proportionate to the level of activity.

Preparation of flexible budget at sales volume of 18,000 units.

Answer to Problem 1APSA

The flexible budget of Company P for the year ended March, 31 shows income from operation at $462,000.

Explanation of Solution

Company P Flexible Budget Report For Year Ended December, 31
Particulars	Variable cost per unit	Total fixed cost	Flexible budget for 18,000 units
Sales	200.00		$36,00,000
Variable costs
Direct materials	65.00		$11,70,000
Direct labour	15.00		$2,70,000
Machinery repairs	4.00		$72,000
Packaging	5.00		$90,000
Utilities	3.00		$54,000
Shipping	7.00		$126,000
Total variable costs	99.00		$1,782,000
Contribution margin	101.00		$1,818,000
Fixed costs
Depreciation		$300,000	$300,000
Utilities		$150,000	$150,000
Plant management salaries		$200,000	$200,000
Sales salary	-	$250,000	$250,000
Advertising expense	-	$125,000	$125,000
Salaries	-	$241,000	$241,000
Entertainment expense	-	$90,000	$90,000
Total fixed cost			$13,56,000
Income from operations			$4,62,000

4.

To determine

Flexible budget:

A flexible budget is a budget that tends to change with change in volume or production. Flexible budget is more useful than fixed budget as it reflects the cost in proportionate to the level of activity.

Preparation of flexible budget at sales volume of 12,000 units.

Answer to Problem 1APSA

The flexible budget of Company P for the year ended March, 31 shows loss from operation at ($144,000).

Explanation of Solution

Company P Flexible Budget Report For Year Ended December, 31
Particulars	Variable cost per unit	Total fixed cost	Flexible budget for 12,000 units($)
Sales	200.00		$2,400,000
Variable costs
Direct materials	65.00		$780,000
Direct labour	15.00		$180,000
Machinery repairs	4.00		$48,000
Packaging	5.00		$60,000
Utilities	3.00		$36,000
Shipping	7.00		$84,000
Total variable costs	99.00		$1,188,000
Contribution margin	101.00		$1,212,000
Fixed costs
Depreciation		$300,000	$300,000
Utilities		$150,000	$150,000
Plant management salaries		$200,000	$200,000
Sales salary	-	$250,000	$250,000
Advertising expense	-	$125,000	$125,000
Salaries	-	$241,000	$241,000
Entertainment expense	-	$90,000	$90,000
Total fixed cost			$1,356,000
Loss from operations			($144,000)