1. Cost Accounting & Management Accounting Flexible Budget & Zero Base Budgeting Lecture-40 Main Ahmad Farhan

2. ParticularsFlexible budget at 17,600 units Production level 16,000 units Production level 24,000 units Direct material26,40024,00036,000 Direct Labor17,60016,00024,000 Consumable704640960 Other variable overhead 3,6963,3605,040 Total variable cost48,40044,00066,000 Depreciation10,000 Other fixed cost5,000 Total63,40059,00081,000 Solution

3. Working Cost at 16,000 activity level Direct material = 30,000 / 20,000 x 16,000 = 24,000 Direct labor = 20,000 / 20,000 x 16,000 = 16,000 Consumables = 800 / 20,000 x 16,000 = 640 Other variable overhead = 4,200 / 20,000 x 16,000 = 3,360 Total variable cost 44,000 Add Fixed cost Depreciation 10,000 Other fixed cost 5,000 Total cost 59,000

4. Working Cost at 24,000 activity level Direct material = 30,000 / 20,000 x 24,000 = 36,000 Direct labor = 20,000 / 20,000 x 24,000 = 24,000

5. Question Capacity level Cost (Hrs) (Rs) 12009,800 10008,700 8007,600 Prepare a flexible budget at 1100 hours

6. Solution CapacityCost Highest level1,2009,800 Lowest level 8007,600 4002,200 Variable rate = Cost variance Capacity variance = 2,200 / 400 = 5.50 per hour

7. Solution Variable cost at 1,200 capacity level = 1200 x 5.50 = 6,600 Fixed cost = Total cost – Variable cost = 9,800 – 6,600 = 3,200

8. Solution Flexible budget at 1,100 capacity level Y = a + bx Y = Budgeted cost a = Fixed cost b = Variable cost X = Capacity level Y = a + bx = 3,200 + (5.50 x 1,100) = 3,200 + 6,050 = 9,250

9. Budget Variance 1. Volume variance 2. Expenditure variance

10. Normal capacity 20,000 units Budgeted cost at normal capacity level Rs 70,000 Actual capacity 17,600 units Budgeted cost at actual capacity Rs 63,400 Actual cost Rs 66,500

11. Volume Variance Original budget at normal capacity70,000 Flexible budget at actual capacity 63,400 (Fav)6,600

12. Expenditure Variance Flexible budget at actual capacity63,400 Actual cost incurred at actual capacity 66,500 (Unfav) 3,100

13. Total Variance Volume Variance 6,600 Add Expenditure variance +(3,100) 3,500 Original budget at normal capacity70,000 Less Actual cost incurred 66,500 3,500 OR

14. Budget / Control Ratios 1. Activity Ratio 2. Capacity Ratio 3. Efficiency Ratio

15. Activity Ratio Flexible budget at actual capacity Original budget at normal capacity X 100

16. Capacity Ratio Actual cost incurred Original budget at normal capacity X 100

17. Efficiency Ratio Original budget at actual capacity Actual cost incurred X 100

18. Activity Ratio Flexible budget at actual capacity Original budget at normal capacity = Rs 63,400 / 70,000 x 100 = 90.57% X 100

19. Capacity Ratio Actual cost incurred Original budget at normal capacity = Rs 66,500 / 70,000 x 100 = 95% X 100

20. Efficiency Ratio Original budget at actual capacity Actual cost incurred = Rs 63,400 / 66,500 x 100 = 95.34% X 100

21. Activity ratio = Capacity ratio x Efficiency ratio 90.57% = 95% x 95.34% = 0.95 x 0.9534 = 0.9057or 90.57%

22. Problems in Traditional Budget 1. Programmers and activities involving wasteful expenditures are not identified. 2. Inefficiencies of a prior year are carried forward in determining subsequent years levels of performance. 3. Managers are not encouraged to identify and evaluate alternative means of accomplishing the same objective. 4. Decision making is irrational in the absence of rigorous analysis of all proposed cost and benefit. 5. Key problems and decision areas are not highlighted. 6. Manager tend to inflate their budget request resulting in more demand for funds than their availability these results in recycling the entire budget process.

23. Advantages of Zero Base Budget 1.It provides the organization with a systematic way to evaluate different operations and programs undertaken. It enables management to allocate resources according to the priority of the programs. 2. No arbitrary cuts or increases in budget estimates are made. It enables the management to approve departmental budget on the basis of cost- benefit analysis. 3. It links budgets with corporate objectives. 4. It helps in identifying areas of wasteful expenditure. 5. It ensures that each and every program undertaken by management is really essential for the organization and is being performed in the best possible way.