Preparing a flexible budget
(a) Prepare a budget for 20X6 for the direct labour costs and overhead expenses of a production department flexed at the activity levels of 80%, 90% and 100%, using the information listed below.
(i) The direct labour hourly rate is expected to be $3.75.
(ii) 100% activity represents 60,000 direct labour hours.
(iii) Variable costs
Indirect labour $0.75 per direct labour hour
Consumable supplies $0.375 per direct labour hour Canteen and other
welfare services 6% of direct and indirect labour costs
(iv) Semi-variable costs are expected to relate to the direct labour hours in the same manner as for the last five years.
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Year 20X1
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Direct labour
hours 64,000
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Semi-variable
costs $ 20,800
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20X2
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59,000
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19,800
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20X3
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53,000
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18,600
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20X4
20X5
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49,000
40,000 (estimate)
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17,800
16,000 (estimate)
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(v)
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Fixed costs
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$
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Depreciation
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18,000
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Maintenance
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10,000
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Insurance
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4,000
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Rates
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15,000
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Management salaries
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25,000
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(vi)
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Inflation is to be ignored.
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(b) Calculate the budget cost allowance (ie expected expenditure) for 20X6 assuming that 57,000 direct labour hours are worked.