imt 58 management accounting m3

8/12/2019 IMT 58 Management Accounting M3

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8. Types ofstatements

prepared

Financial accounting preparesgeneral purpose statement Profitand Loss Account and BalanceSheet which are used by external

In management accounting special purpose reports are prepared, e.g., performance report of salesmanager or any other department

users. manager which are used by toplevel management.

9. Publication andaudit

Financial statements, i.e., P&L A/cand Balance Sheet are published forgeneral public use and also sent toshareholders. These are required to

be audited by the CharteredAccountants.

Management accounting statementsare for internal use and thus neither

published for general public usenor these are required to be audited

by the Chartered Accountants.

10. Monetary and Non-Monetarymeasurements

Financial accounting providesinformation in terms of money only.

Management accounting may applymonetary or non-monetary units ofmeasurements. For example:information may be expressed interms of Rupees or units ofQuantity, machine hours, labourhours, etc.

Q2. What are the methods by which semi variable cost can be split in its fixed and variableelements?

Ans. Semi-variable costs are those costs which contain both fixed and variable components andare thus partly affected by fluctuations in the level of activity, such as telephone bills, gas,electricity, etc. Such costs can be depicted graphically as follows:

Activity Level

Methods of segregating Semi-variable costs into fixed and variable cost: The segregation ofsemi-variable costs into fixed and variable costs can be carried out by using the followingmethods:

Variable Cost

Total Cost

Fixed Cost


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(a) Graphical Method: Under this method, the following steps are followed:(i) A large number of observations regarding the total costs at different levels of outputare plotted on a graph with the output on the X-axis (ii) The total cost is plotted on the Y-axis.(iii) Then, by judg ment, a line of best -fit, which passes through all or most of the

points is drawn(iv) The points at which this line cuts the Y-axis indicates the total fixed cost

component in the total cost(v) If a line is drawn at this point parallel to the X-axis, this indicate the fixed cost.(vi) The variable cost, at any level of output, is derived by deducting this fixed cost

element from the total cost.The following graph illustrates this:

Output (in units)

(b) High points and low points method: Under this method, the total cost at highest andlowest volume is divide by the difference between the sales value at the highest and thelowest volume. The quotient thus obtained gives us the rate of variable cost in relation tosales value.

(c) Analytical method: Under this method, an experienced cost accountant tries to judgeempirically what portion of all the semi-variable cost would be variable and what would

be fixed. The degree of variability is ascertained for each item of semi-variable expenses.For example, some semi-variable expenses may vary to the extent of 20% while othersmay vary to the extent of 80%.

(d) Comparison by period or level of activity method: Under this method, the variableoverhead may be determined by comparing two levels of output with the amount ofexpenses at those levels. Since the fixed element does not change, the variable elementmay be ascertained with the help of a formula:

Change in the amount of expense

30

Semi-variable cost 20 (in rupees ) VariableCost

for this output

10 Fixed Cost


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Change in quantity of output

(e) Least squared method: this is the best method to segregate semi-variable costs into itsfixed and variable components. This is a statistical method and is based on finding out aline of best fit for a number of observations. The method uses linear equation y= mx+c,

where:m represents the variable element of cost per unit c represe nts the total fixed costy represents the total cost x represents the volume of output. The total cost is thus split into fixed and variable elements by solving this equation. Byusing this method, the expenditure against an item is determined at various levels ofoutput and values of x and y are fitted in the above formula to find out the values of mand c.

Q3. Medical aid co. manufactures a special product AID. The following particulars werecollected for the year 1998:

Monthly demand of AID 1,000 unitsCost of placing an order Rs. 100Annual carrying cost per unit Rs 15Normal usage 50 units per week.Minimum usage 25 units per weed

maximum usage 75 units per week re-orderusage 4 to 6 week

Compute from the above:a. re-order quantityb. re-order levelc. minimum leveld. maximum level

Ans. (i) Re-order quantity of units used = (2AS)/C

= (2*2600*100)/15 (See note below)

= 186 units (approx.)

Where A = Annual demand of input units


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S = Cost of placing an orderC = Annual carrying cost per unit

(ii) Re-order level = Maximum re-order period*Maximum usage

= 6 weeks*75 units

= 450 units.

(iii) Minimum level = Re-order level (normal usage*average re-order period)

= 450 units (50 units* (4+6)/2)

= 450 units (50 units* 5 weeks)

= 450 units 250 units

= 200 units.

(iv)Maximum level=Re-order level+Re-order quantity (minimum usage*minimum order period)

= 450 units+186 units-(25 units*4weeks)

= 450 units+186 units-100 units

= 536 units.

Note:

A = Annual demand of input units for 12,000 units of Medical Aid Co.

= 52 weeks* normal usage of inputs per week

= 52 weeks*50 units of input per week

= 2600 units.

Q4. What do you understand by JIT?

Ans. Just In Time is a n inventory strategy companies employ to increase efficiency and decreasewaste by receiving goods only as they are needed in the production process, thereby reducinginventory costs. This method requires that producers are able to accurately forecast demand.

A good example would be a car manufacturer that operates with very low inventory levels,relying on their supply chain to deliver the parts they need to build cars. The parts needed to


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manufacture the cars do not arrive before nor after they are needed, rather do they arrive just asthey are needed .

JIT Purchasing

JIT purchasing refers to the technique of eliminating waste during the purchasing phase with thehelp of the mutual understanding with good suppliers. The major elements of JIT purchasinginclude locating, choosing and then developing mutual relations with the suppliers the number ofthe suppliers should be limited and both the buyer and the supplier should possess mutualdependence, having long term contracts which results in reduction of the lead time, aiming atfinding solutions to the problems by involving participation of the supplier at an earlier stageduring the decision making process.

JIT Manufacturing

JIT manufacturing refers to the technique of eliminating waste during the manufacturing process.During the production of the products one important factor to be kept in mind is to fulfill or tomeet the customers requirement in context of the quality. JIT manufacturing aims at eliminatingall those factors or activities that act as a hindrance in the achievement of such goals of qualitymaintenance.

Q5. Explain the term administrative overheads and briefly discuss three methods oftreatment thereof in cost accounts.

Ans . Administrative overhead is defined as the sum of those costs of general management andof secretarial accounting and administrative services, which cannot be directly related to the

production , marketing , research or development functions of the enterprise.

It constitutes the expenses incurred in connection with the formulation of policy directing theorganization and controlling the operations of an undertaking.

ACCOUNTING TREATMENT OF ADMINISTRATIVE OVERHEADS : There are threedistinct methods of accounting of administrative overheads, which are discussed below :

(a) Apportioning administrative overheads between production and sales departments :According to this method administrative overheads are apportioned over production andsales departments. The reason for the apportionment of overhead expenses over thesedepartments, recognizes the fact that administrative overheads are incurred for the benefitof both of these departments. Therefore each department should be charged with the


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proportionate share of the same. When this method is adopted, administrative overheadslose their identity and get merged with production and selling and distribution overheads.

Disadvantages:

(1) It is difficult to find suitable basis of administrative overhead apportionment over production and sales departments.

(2) Lot of clerical work is involved in apportioning overheads.(3) It is not justified to apportion total administrative overheads only over production and

sales departments when other equally important department like finance is also there.

(b) Charging to profit and loss account : According to this method administrative overheadsare charged to costing profit and loss account. The reason for charging to costing profitand loss are firstly, the administrative overheads are concerned with the formulation of

policies and thus are not directly concerned with either the production or the selling and

distribution functions. Secondly, it is difficult to determine a suitable basis forapportioning administrative overheads over production and sales departments. Lastly,these overheads are the fixes costs. In view of these arguments, administrative overheadsshould be charged to profit and loss account.

Disadvantages:

(1) Costs of products are understated as administrative overheads are not charged to costs.(2) The exclusion of administrative overheads from cost of products is against sound

accounting principle.

(c) Treating administrative overheads as a separate addition to cost of production/sales :This method considers administration as a separate function like production and salesand, as such costs relating to formulating the policy, directing the organization andcontrolling the operations are taken as a separate charge to the cost of the jobs or a

product, sold along with the cost of other functions. The basis which are generally usedfor apportionment are:

(i) Works cost(ii) Sales value or quantity(iii) Gross profit on sales(iv) Quantity produced(v) Conversion cost, etc.

Section-B

Q1. How does ABC differ from the traditional costing approach?

Ans. Costing systems helps companies determine the cost of a product related to the revenue itgenerates. Two common costing systems used in business are traditional costing and


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activitybased costing. Traditional costing assigns manufacturing overhead based on the volumeof a cost driver, such as the amount of direct labor hours needed to produce an item. A cost driveris a factor that causes cost to incur, such as machine hours, direct labor hours and direct materialhours. Activity-based costing allocates the costs of manufacturing a product according to theactivities needed to produce the item.

Basically, the traditional costing is used commonly by manufacturing companies to assignmanufacturing overheads to the units they produce. Using this, only the products are assigned anoverhead cost by the accountant. The downside of this method of costing is that it neglects toconsider the non-manufacturing costs like administration expenses which are associated with

production. Today, such method is considered outdated because a lot of the manufacturingcompanies already use computers and machines for their production. Also business accountingsoftware is already being used widely. On the brighter side, the traditional costing is easy to useespecially for those companies that have one product.

On the other hand, the activity-based costing (ABC) is a more logical method of assigningmanufacturing overhead costs to products. Unlike traditional costing that simply assigns costs

based on the machine work hours, the ABC assigns costs first to the activities and processes thatcause the overhead. Then, these costs are assigned only to the products that require the activities.Simply saying, the ABC is typically used as a supplemental costing system for businesses.

The following are the basic differences of the two methods of costing:

1. The traditional costing method focuses on structure rather than on processes while theABC is more on the activities than on structure.

2. Traditional costing method is already obsolete especially with the changing technologytrends such as the introduction of the business accounting software.

3. The ABC provides more accurate costs of products.4. Whereas the traditional costing method has increasingly become obsolete, the ABC

became a rising method since 1981.Q2. What is service costing? Describe the type of industries in which such a system wouldbe suitable.

Ans . Service costing is a cost accounting method concerned with establishing the costs ofservices rendered.

Despite this definition, we should note immediately that even though we may be dealing withservices that are intangible, the cost accounting methods we use are essentially the same as if wewere making cars, biscuits or televisions.


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Work Overhead 1890 2580 1875Indirect Expenses 300 750 225

Total Cost 6140 7580 3800Total cost of production = Total Cost of Process (X+Y+Z)

= Rs. 6140+7580+3800= Rs. 17520

Q4. What are the advantages of variable costing?

Ans. Variable costing is a managerial accounting cost concept. Under this method manufacturingoverhead is incurred in the period that a product is produced. It is a costing method that includes onlyvariable manufacturing costs--direct materials, direct labor, and variable manufacturing overhead--inunit product costs.

Advantages of variable costing system:

1. Variable costing provides a better understanding of the effect of fixed costs on the net profits because total fixed cost for the period is shown on the income statement.

2. Various methods of controlling costs such as standard costing system and flexible budgets haveclose relation with the variable costing system. Understanding variable costing system makes theuse of those methods easy.

3. Companies using variable costing system prepare income statement in contribution marginformat that provides necessary information for cost volume profit (CVP) analysis. This datacannot be directly obtained from a traditional income statement prepared under absorptioncosting system.

4. The net operating income figure produced by variable costing is usually close to the flow of cash.It is useful for businesses with a problem of cash flows.

5. Under absorption costing system, income of different periods changes with the change ofinventory levels. Sometime income and sales move in opposite directions. But it does not happenunder variable costing.

Q5. What do you mean by break-even analysis and explain its uses and applications? Ans.Break even analysis is an analysis to determine the point at which revenue received equals thecosts associated with receiving the revenue. Break-even analysis calculates what is known as amargin of safety, the amount that revenues exceed the break-even point. This is the amount thatrevenues can fall while still staying above the break-even point.


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Break-even analysis is a supply-side analysis; that is, it only analyzes the costs of the sales. Itdoes not analyze how demand may be affected at different price levels.

Finding break even point of a product or service is an essential tool in choosing the best price perunit of a product and also helping to determine projected sales. Break even analysis can used for

a number of different applications. Its basic function is to determine when a product or servicewill be profitable. This analysis can be applied to many other applications to determine a futureforecast in sales, set a unit price and to target the best strategic options for the company.

Once the break-even figures are determined, the company can then use this information for otherfinancial projections. The most common break even analysis applications and uses are:

1. Determining the point of profitability

Many things should be considered when finding the break even point for a product's profitability.A company's goal is to be profitable as quickly as possible, so it is more effective for a companyto run the numbers through a set of break even points to determine where the company will havethe optimal chance of making a profit. Harvard business school provides a break even analysistoolkit that includes information and analysis tools to determine the break even point of any

product or service. Business Tools provides a guide and calculator to perform basic break evenanalysis.

2. Finding the break even point for unit pricing

Performing break even analysis can also lead to the numbers that will help determine a set price per unit. This is calculated by leaving the cost per unit as the variable in a break even analysis

equation. The most effective unit price will bring quick profitability to the company without thecompany spending too much for production and marketing of the product.Bradley University provides information on all of the equations to determine break even analysis,including determining the break even cost, break even number of units and for setting the unit

price. Bean Counter explains the relationships between cost, volume and profits in break evenanalysis.

3. Using the analysis information to choose the best company strategy

Another use for break even analysis is to use the information from the analysis to help determinethe company's financial strategy. If a company's profitability is determined by the success of oneor more products, using the break even point for each product will provide a timeline for thecompany. This can be used to choose a better overall financial strategy that fits the projectedcosts and profits.

The Weatherhead School of Management provides information on break even analysis and howto use this analysis to help make strategic decisions. All Business provides a guide to use breakeven analysis for making business decisions and choosing the best strategies.


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Section-C

Q1. Explain advantages and limitations of budgeting.

Ans . Advantages Of Budgeting:

1. Reinforce the management process of planning ahead . In fact, budget compel themanagers to think and anticipate of future challenges, formulate strategies, etc. so as toachieve the desired companys goals

2. A budget is in reality a set of plan. This plan is created by all the relevant managers tocreate a course of action for future action.

3. Create a basis for Performance Evaluation of Managers performance. Incentives are based on how much have been achieved against the budgeted figures. Hence, if budgetsare set up realistically will assist to motive manager and employees positively.

4. Aid in resource planning and allocation, key or scarce resources or capital expenditure

are carefully review during the establishment of the budgets. 5. Promote continuous improvement . In the budgeting stage, non-value adding activities

shall be eliminated, new or enhanced processes are designed to increase productivity, etc. 6. Budgeting is the best time for all level of manager to co-ordinate together so as to plan

ahead, promotes teamwork, process improvement and goal congruency between thecompany and the employees.

7. Delegation of duties, authority limit and responsibility are more properly segregated as budgets are set up. With budgets, top management feel that they are in control of thevarious business activities of the company.

Disadvantages of Budgeting:

1. De-motivation of employees as they feel that the budgeted figures are way too high toachieve

2. Budgetary slack or padding the budgets as managers will intentionally blow up their budget figures for fear of top managements reprimanding them

3. A budget tends to emphasize on results and the real reasons are being ignored 4. Unrealistic budgets can lead managers to make decisions that might be detrimental to

the company. A good example of over-ambitious sales budget will lead to disastrous

impact like giving steep discount to increase volume,etc. 5. No matter how well prepared a budget might be, it will never be able to reflect truly the

reality/complexities faced by the company 6. There is a need to revise/update the budget which at the time was based on a certain set

of circumstances/best information. 7. Budgets if not properly buy in by all relevant parties will not get the full cooperation

hence it might lead to the motto: Planning to fail.


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Q2. What are transfer prices? What are different types of transfer prices? Ans. Transfer price is the price at which divisions of a company transact with each other. Transactions mayinclude the trade of supplies or labor between departments. Transfer prices are used whenindividual entities of a larger multi-entity firm are treated and measured as separately run entities.

Different Types of Transfer Prices

1. Market-based Transfer Price

Market conditions which are appropriate for adoption Are generally appropriate in a perfect market, where there is homogeneous product with onlyone price for both sellers and buyers and no buying or selling costs. In a perfect market, Selling Division (SD) will be operating at full capacity and can sell

whatever quantity of intermediate product it can produce in the external market. In this situation,internal transfers will result in a need to sacrifice external sales. The benefit forgone that is thecontribution lost (opportunity cost) from sacrificing external sales should be included in thetransfer price. Thus in this situation TP=MP will be consistent with the general TP rule.

TP = MC+OC = MP

In a perfect market, the minimum TP is also the maximum TP. Thus, both SD and BD will be happy with a transfer price set as the market price

The adoption of market-based transfer price in a perfectly competitive market meet the

criteria of a good transfer price, that is it will promote goal congruent decisions, preservedivisional autonomy and provide an equitable basis for performance evaluation.

Limitations: (i) As a result of product differentiation, they may be no comparable product or a single market price.(ii) Market price may vary because of over-supply or under- supply, promotions, or product

dumping by foreign competitors .

2. Full-cost based Transfer Price

Market conditions which are appropriate for adoption In an imperfect market, it may be unwise to always set transfer price exactly at the variablecosts of production, as such prices do not provide for the replacement of fixed assets.


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The Supply Division (SD) will want to base the transfer price on total absorption cost toensure that it will provide a contribution to cover the fixed overheads. Full-cost based transfer price is widely used because managers require an estimate of long-run marginal cost for decision-making. However, traditional absorption costing systems tend to

provide poor estimates of long-run marginal cost for decision-making. ABC will provide betterestimates of long run MC.

Limitations: (i) It can lead buying division (BD) to make sub -optimal decisions because BD regards thetransfer price (which includes the fixed costs) as a wholly variable cost.

3. Negotiated Transfer Price

Market conditions which are appropriate for adoption In an imperfect market (different selling costs for internal and external sales, differentialmarket prices), transfer prices set at the prevailing or planned market price are not optimal i.e.will not induce SD and BD to adopt optimal output level. Central/corporate managementintervention is necessary in order to ensure that optimal output levels are set but this process mayundermine divisional autonomy. In this situation, it is more appropriate to adopt negotiated transfer prices. If both managershad been provided with all the information and were educated to use information correctly, it islikely that a negotiated solution would have emerged which would have been acceptable to boththe divisions and the group.

When there is unused capacity, the transfer price range for negotiations generally lied between the minimum price at which SD is willing to sell (its marginal cost) and the maximum price BD is willing to pay (the external supplier price net off any external purchase related costs).

Limitations: (i) Can lead to sub-optimal decisions(ii) Time-consuming(iii) Strongly influenced by the bargaining skills and power of the divisional managers(iv)

Inappropriate in certain circumstances (e.g. no market for the intermediate product or animperfect market exists as the SD will have a bargaining disadvantage).

Q3. Define expense centre. What is the suitability of the measure of performance in anexpense centre?

Ans. Expense centers are responsibility centers for which inputs, or expenses are measured inmonetary terms, but for which outputs are not measured in monetary terms. There are twogeneral types of expense centers:


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and is expected to sell for only $1.2 million. If, in deciding whether or not to continueconstruction, the $1 million sunk cost were incorrectly included in the analysis, the firm mayconclude that it should abandon the project because it would be spending $1.5 million for areturn of $1.2 million. However, the $1 million is an irrelevant cost, and should be excluded.Continuing the construction actually involves spending $0.5 million for a return of $1.2 million,which makes it the correct course of action.

Whereas a sunk cost is a retrospective (past) cost that has already been incurred and cannot berecovered. Sunk costs are sometimes contrasted with prospective costs, which are future coststhat may be incurred or changed if an action is taken. Both retrospective and prospective costsmay be either fixed (continuous for as long as the business is in operation and unaffected byoutput volume) or variable (dependent on volume) costs. For example, if a firm sinks $1 millionon an enterprise software installation that cost is "sunk" because it was a one-time expense andcannot be recovered once spent. A "fixed" cost would be monthly payments made as part of aservice contract or licensing deal with the company that set up the software. The upfrontirretrievable payment for the installation should not be deemed a "fixed" cost, with its costspread out over time. Sunk costs should be kept separate. The "variable costs" for this projectmight include data centre power usage, etc.

Short-run decision making involves choosing among alternatives and tends to be short-run innature with an immediate end in view. Sound short-run decision making results in decisions thatachieve an immediate objective and serve the overall strategic goals of the organization.

The costs which should be used for decision making are often referred to as " relevant costs ".CIMA defines relevant costs as 'costs appropriate to aiding the making of specific managementdecisions'.

To affect a decision a cost must be:

a) Future: Past costs are irrelevant, as we cannot affect them by current decisions and they arecommon to all alternatives that we may choose.

b) Incremental: ' Meaning, expenditure which will be incurred or avoided as a result of making adecision. Any costs which would be incurred whether or not the decision is made are not saidto be incremental to the decision.

c) Cash flow: Expenses such as depreciation are not cash flows and are therefore not relevant.Similarly, the book value of existing equipment is irrelevant, but the disposal value is relevant.

Other terms:


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Skilled = (60-70)*2240 = Rs.22400 (A)Semi-skilled = (40-50)*960 = Rs. 9600 (A)

Unskilled = (30-20)*2560 = Rs. 25600 (F)Total Labour rate variance = Rs.6400 (A)

(iii) Labour efficiency variance = (Standard time Actual time) * Standard rateSkilled = (2250-2240)*60 = Rs.600 (F)

Semi-skilled = (1350-960)*40 = Rs. 15600 (F)Unskilled = (1800-2560)*30 = Rs. 22800 (A)

Total Labour efficiency variance = Rs.6600 (A)

(iv) Labour mix variance = ( Revised standard time Actual time) * Standard rateSkilled = (2400-2240)*60 = Rs.9600 (F)

Semi-skilled = (1400-960)*40 = Rs. 19200 (F)Unskilled = (1920-2560)*30 = Rs. 19200 (A)

Total Labour mix variance = Rs.9600 (F)

Revised standard time calculated as under:

Revised standard time = Standard time of grade * Total Actual timeTotal standard time

Skilled = 2250 *5760 = 2400 weeks5400

Semi-skilled = 1350 * 5760 = 1440 weeks5400

Unskilled = 1800 * 5760 = 1920 weeks5400

(v) Labour revised efficiency variance = (Std. time Revised Std. time) * Standard rate

Skilled = (2250-2400)*60 = Rs.9000 (A)Semi-skilled = (1350-1440)*40 = Rs. 3600 (A)Unskilled = (1800-1920)*30 = Rs. 3600 (A)

Total Labour revised efficiency variance = Rs.16200 (A)Check:

(i) Labour cost variance = Labour rate variance + Labour efficiency variance


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Rs. 13000(A) = Rs. 6400(A) + Rs. 6600(A)

(ii) Labour efficiency variance=Labour mix variance+Labour revised efficiencyvariance

Rs. 6600(A) = Rs. 9600(F) + Rs. 16200(A)


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Case Study1

A Ltd. furnishes the following data relating to the year 2008: 1st half of the year 2 nd half of the year

Sales (Rs.) 45,000 50,000

Total cost (Rs.) 40,000 43,000Assuming that there is no change in prices and variable cost and that the fixed expenses areincurred equally in the two half year period, calculate: 1. P/V Ratio2. Fixed expenses3. Break even sales4. Percentage of margin of safety to total sales.

Ans. Profit = Sales- Total cost

Profit (1 st half of the year) = 45000-40000 = Rs.5000

Profit (2 nd half of the year) = 50000-43000 = Rs.7000

(i) P/V Ratio = Difference in ProfitDifference in Sales

= 20005000

= 40%PV Ratio will remain same for each half year.

(ii) Fixed Expenses = (Sales*P/V Ratio) - Profit

Fixed expenses (1 st half of the year) = (45000*40%) 5000

= Rs. 13000Fixed expenses (2nd half of the year) = (50000*40%) 7000

= Rs. 13000

Total Fixed Expenses = Rs. 13000+ Rs.13000= Rs. 26000

(iii) Break even sales = Fixed CostP/V Ratio

Break even sales (1 st half of the year) = 13000


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40%= Rs.32500

Break even sales (2 nd half of the year) = 13000

40%= Rs.32500

Total Break even sales = Rs. 32500+ Rs.32500= Rs. 65000

(iv) Percentage of margin of safety to total sales = Total ProfitP/V Ratio

(1st half of the year) = 5000

40%= Rs.12500

(2nd half of the year) = 7000

40%= Rs. 17500

Total Percentage of margin of safety to total sales = Rs.12500+Rs.17500= Rs. 30000


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Case Study2

Goodluck Ltd. is currently operating at 75% of its capacity. In the past two years, the levelof operations were 5f5% and 65% respectively. Presently, the production is 75,000 units.The company is planning for 85% capacity level during 2013 2014. The cost details are

as follows:55% 65% 75%

Rs. Rs. Rs.Direct Materials 11,00,000 13,00,000 15,00,000Direct labour 5,50,000 6,50,000 7,50,000factory overheads 2,00,000 2,00,000 2,00,000Selling overheads 3,10,000 3,30,000 3,50,000Administrative overheads 3,20,000 3,60,000 4,00,000

-------------- --------------- ---------------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.

In percentageDirect material 8Direct labour 5Variable selling overheads 8Fixed factory overheads 10Fixed selling overheads 15Administrative overheads 10Required: Prepare flexible budget for the period 20X1 20X2 at 85% level of capacity. Alsoascertain profit and contribution. Ans. Flexible budget for the period 20X1-20X2 at 85% level of capacity:

Particulars Amount (Rs.)Direct Material (20*108%*85000) 1836000Direct Labour (10*105%*85000) 8925000Factory Overheads (200000*110%) 220000Selling Overheads

Fixed (200000*115%) 230000Variable (2*108%*85000) 183600Administration Overheads

Fixed (100000*110%) 110000Variable (4*110%*85000) 374000

Total Cost 11878600


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Profit (25% of Total Cost) 26969659Sales 14848250

Contribution = Fixed cost + Profit

= Direct material + Direct Lobour + Factory overheads + Fixed Selling Cost +Fixed Administration Cost + Profit

= 1836000+ 8925000+ 220000+ 230000+ 110000 + 2969650

= Rs. 14290650

imt 58 management accounting m3

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