Flexible budget statement for next year operating at 85% capacity
Workings
1 65% of capacity = 10,000 units
∴100% of capacity = 10,000 ÷ 0.65 = 15,385 units
∴ 85% of capacity = (10,000 ÷ 0.65) × 0.85 = 13,077 units
∴ 75% of capacity = 11,538
∴ 55% of capacity = 8,462
2 Current direct material cost per unit = $1,000,000 ÷ 10,000
= $100 per unit
∴ Flexible budget allowance for next year = $100 × 1.06 × 13,077
= $1,386,162
3 Current direct wages cost per unit = $1,750,000 ÷ 10,000
= $175 per unit
∴ Flexible budget allowance for next year = $175 × 1.03 × 13,077
= $2,357,129
4 Production overhead increases by $53,830 for an increase in activity of (10,000 – 8,462) units
∴Variable production overhead per unit = $35
∴Variable overhead allowance for 85% capacity = 13,077 × $35 = $457,695
Plus 7% increase $32,039
Total allowance $489,734
5 Selling overhead increases by $7,690 for an increase in activity of (10,000 – 8,462) units.
∴Variable cost per unit = $5
∴Variable overhead allowance for 85% capacity = 13,077 × $5 = $65,385
Plus 7% increase $4,577
Total allowance $69,962
6 $
Total production overhead at 65% activity 650,000
Less variable overhead (10,000 × $35 (W4)) 350,000
Fixed overhead this year 300,000
Plus 10% increase 30,000
Total allowance 330,000
7 $
Total selling overhead at 65% activity 200,000
Less variable overhead (10,000 × $5 (W5)) 50,000
Fixed overhead this year 150,000
Plus 7.5% increase 11,250
Total allowance 161,250
8 Administration overhead = $120,000 × 1.1 = $132,000
9 The cost and selling price structure is as follows.
%
Sales price 100.00
Profit 16.67
Cost 83.33
∴Profit as a percentage of cost = 16.67 / 83.33× 100% = 20% of cost
$
Total cost ($4,302,987 + $623,250) 4,926,237
Profit at 20% of cost 985,247
∴ Sales value 5,911,484
