## 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 Output Units 50% 5,000 80% 8,000 100% 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% Fixed (50,000) 25,000 40,000 50,000 Factory Cost 7,75,000 12,25,000 15,25,000 Admin Expenses 40% Fixed (60,000) 24,000 24,000 24,000 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 Expenses 7,90,000 9,48,000 11,85,000 14,22,000 15,80,000 Semi-variable Expenses Maintenance and Repairs 3,50,000 3,50,000 3,85,000 4,20,000 4,20,000 Indirect labor 7,90,000 7,90,000 8,69,000 9,48,000 9,48,000 Sales Department Salaries 3,80,000 3,80,000 4,18,000 4,56,000 4,56,000 Sundry Expenses 2,80,000 2,80,000 3,08,000 3,36,000 3,36,000 Fixed Expenses Wages and Salaries 9,50,000 9,50,000 9,50,000 9,50,000 9,50,000 Rent/Rates and Taxes 6,60,000 6,60,000 6,60,000 6,60,000 6,60,000 Depreciation 7,40,000 7,40,000 7,40,000 7,40,000 7,40,000 Sundry Admin 6,50,000 6,50,000 6,50,000 6,50,000 6,50,000 Total Cost (A) 98,00,000 108,00,000 124,00,000 141,60,000 152,60,000 Sales (B) 100,00,000 120,00,000 150,00,000 180,00,000 200,00,000 Profit (A – B) 2,00,000 12,00,000 25,20,000 38,40,000 47,40,000

## 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)

## Solution

 Output: 10,000 units (50% capacity) Output: 12,000 units (60% capacity) Output: 16,000 units (80% capacity) Per unit (\$) Total (\$) Per unit (\$) Total (\$) Per unit (\$) Total (\$) Sales Value 200 20,00,000 196 23,52,000 190 30,40,000 Material Cost 100 10,00,000 102 12,24,000 105 16,80,000 Labor Cost 30 3,00,000 30 3,60,000 30 4,80,000 Variable Factory Overhead 18 1,80,000 18 2,16,000 18 2,88,000 Fixed Factory Overhead 12 1,20,000 10 1,20,000 7.50 1,20,000 Variable Admin Overhead 10 1,00,000 10 120,000 10 1,60,000 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

### 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.

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.

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