Semester VI

Management Control System

BBA (2017-2020)
Preparation of flexible budget:

Read the following question carefully:

 You have appointed as a production manager of your company.

 The directors of the company expect to be operating at 80% of the capacity next year.
 Currently the company is operating at 65% of the capacity.
 65% of the capacity represents an output of 12,500 units of the product.
 Other information related to the company is as follows:

i. The budgets for the current year at three different levels of capacity utilization are as follows:
Capacity level 55% 65% 75%
INR INR INR
Direct materials 10,57,650 12,50,000 14,42,250
Direct wages 18,50,888 21,87,500 25,23,938
Production overheads 7,45,212 8,12,500 8,79,788
Selling & distribution overheads 2,40,388 2,50,000 2,59,612
Administrative overheads 1,50,000 1,50,000 1,50,000
Total costs 40,44,138 46,50,000 52,55,588
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ii. Profit in any year is budgeted to be 16 % of sales.
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iii. The following percentage increase in costs is expected next year:
Particulars Increase %
Direct material 6
Direct wages 2
Variable production overheads 6
Variable selling & distribution overheads 6
Fixed production overheads 10
Fixed selling & distribution overheads 8
Administrative overheads 10

You are required to prepare a flexible budget statement for the next year on the
assumption that the company operates at 80% of capacity, showing both the
contribution and profit.
 Suggested answer
Your presentation for flexible budget for the next financial year at utilization at 80% capacity.

Note: we will start with the workings for each item which has been provided in the
question:

Working notes:

Step I: We will find the production capacity at 100% level and production of quantities
at 80% level:

1. 65% of capacity = 12,500 units

 100% of capacity = 12,500 units  0.65 = 19,230 units
 80% of capacity = 19,230 units  0.80 = 15,384 units

Step II: We will find the material cost of each unit than total cost for 15,384 units with
the adjustment of inflation (Note: use the financial information for middle
column):

2. Current direct material cost per unit
Flexible budget allowance for next year
= INR 12,50,000  12,500 = INR 100 per unit
Cost per unit x (1 + inflation rate) X
number of Quantities to be produced
= INR 100  (1+ 0.06)  15,384 units
= 100 X (1.06) X 15384 = INR 16,30,704

(Always you have to find the inflation rate in same manner)

 Step III: We will find the direct wages cost of each unit than total cost for 15,384 units
with the adjustment of inflation (Note: use the financial information for middle
column):

3. Current direct wages cost per unit
Flexible budget allowance for next year
= INR 21,87,500  12,500 = INR 175 per unit
Wages per unit x (1 + inflation rate) X
number of Quantities to be produced
= INR 175  (1+ 0.02)  15,384 units
= 100 X (1.02) X 15384 = INR 27,46,044

Step IV: We will find the Variable production overheads for 100% capacity than for
80% capacity with the adjustment of inflation (Note: use the financial information
for middle column):

4. Refer at
55% capacity Variable production overheads is INR 7,45,212 and
65% capacity Variable production overheads INR 8,12,500.
So capacity change by 10% and Variable production overheads is also changed.
Variable production overheads increases by (8,12,500 -7,45,212) = INR 67,288 per 10% increase in activity

Hence, at 100% Variable production overheads would be

Variable overhead allowance for = = INR 5,38,304

672880 x

= Add 6% inflation (5,38,304 X 1.06) = INR 5,70,602

Step V: We will find the Selling & distribution overheads for 100% capacity than for
80% capacity with the adjustment of inflation (Note: use the financial information
for middle column):

5. Refer at
55% capacity Variable Selling & distribution overheads is INR 2,40,388 and
65% capacity Variable production overheads INR 2,50,000.
So capacity change by 10% and Variable Selling & distribution overheads is also changed.
Variable production overheads increases by ( INR 250000- 240388) = INR 9,612 per 10% increase in activity

Hence, at 100% Variable production overheads would be

Variable overhead allowance for = = INR 76,896

96120 x

= Add 6% inflation (76,896 X 1.06) = INR 581,510

Step VI: We will find the Fixed Overheads cost for the production with the adjustment
of inflation (Note: use the financial information for middle column):
Note: Fixed overhead cost does not change normally, till we do not produce more than
the 100% capacity.

6. Total production overhead at 65% activity INR 8,12,500

Less: Variable overheads 672880 x INR 4,37,372
(Refer working note number 4)
Fixed production overheads INR 3,75,128
Add 10% inflation ( 3,75,128 x 1.10) INR 4,12,641

Step VII: We will find the Fixed Overheads cost for the Selling & distribution with the
adjustment of inflation (Note: use the financial information for middle column):
Note: Fixed overhead cost does not change normally, till we do not produce more than
the 100% capacity.

7. Total the Selling & distribution overhead at 65% activity =INR 2,50,000
Less: Variable overheads 96120 X =INR 62,478
(Refer working note number 5)
Fixed production overheads =INR 1,87,522
Add 8% inflation ( 1,87,522 X 1.08) =INR 2,02,524

8. Administrative overheads =INR 1,50,000

Add 10% inflation (150000 X 1.08) =INR 1,65,000
Step IX: Place all the calculated values according to their variables: (Worming note no.
1 to 8):

Flexible budget statement for next year operating at 80% capacity.

Particulars Working no. 80%

Output 1 15,384 units
INR INR
Sales revenue 9*** 69,70,830
Variable costs:
Direct materials 2 16,30,704
Direct wages 3 27,46,044
Variable production overheads 4 5,70,602
Variable selling & distribution overheads 5 81,510 50,28,860
Contribution 19,41,970
Fixed costs:
Production overheads 6 4,12,641
Selling & distribution overheads 7 2,02,524
Administrative overheads 8 1,65,000 7,80,165
Profit 11,61,805

Step X: *** The following workings are for sales revenue and calculation of profit

9. The cost and selling price structure is as follows:

Sales price (%) 100.00
Profit (%) 16.67
Cost (%) 83.33
16.67
 Profit as a percentage of cost = x100% = 20% of cost
83.33

INR
Total cost
58,09,025
(INR 50,28,860 + INR 7,80,165)
Profit at 20% of cost 11,61,805
69,70,830

Dr. Nitya Nand Tripathi

Assistant Professor
(m) 9177943551
nityanand.tripathi@ibsindia.org