MA – Nov 2019 – L2 – Q2b – Budgetary Control

Prepare a budgetary control statement for MZ Ltd for May 2019 using a flexible budget basis.

Question

b) The following monthly budgeted cost values have been taken from the budget working papers of MZ Ltd for the year ended 30 September 2019.

During May 2019, actual costs for the activity level of 82% were as follows:

Item GH¢
Direct Materials 10,500
Direct Labour 12,250
Direct Expenses 5,600
Production Overhead 6,250
Selling Overhead 15,150
Administration Overhead 14,200
Total 63,950
Required:
Prepare a budgetary control statement for MZ Ltd on a flexible budget basis for the month of May 2019.
(10 marks)

Answer

Flexible Budget
Basic calculations
Direct Material

At 75% AL = GH¢9,375/75 = GH¢125; At 85% AL = 10,625/85 = GH¢125; At 95% AL
= GH¢11,875/95 = GH¢125. Thus, direct material cost is variable cost. It is constant at
the unit level but changes with activity level. (0.5 mark)
Direct Labour

At 75% (AL) = GH¢11,250/75 = GH¢150; At 85% AL = 12,750/85 = GH¢150; At 95%
AL = GH¢14,250/95 = GH¢150. Thus, direct labour cost is variable cost. It is constant
at the unit level but changes with activity level.
(0.5 mark)
Direct Expenses

At 75% (AL) = GH¢4,875/75 = GH¢65; At 85% AL = 5,525/85 = GH¢65; At 95% AL =
GH¢6,175/95 = GH¢65. Thus, direct expense cost is variable cost. It is constant at the
unit level but changes with activity level.
(0.5 mark)
Production Overhead

At 75% (AL) = GH¢6,200/75 = GH¢82.67; At 85% AL = 6,600/85 = GH¢77.65; At 95%
AL = GH¢7,000/95 = GH¢73.68. Thus, production overhead is semi-variable cost.
It changes at both total and activity level.
Therefore, using high-low method the separation would be done as follows:
VC/unit = (GH¢7,000 – GH¢6,200)/(95% – 75%) = GH¢800/20 = GH¢40 per 1%
Fixed Cost (Using highest activity level) = 7,000 – (95 x GH¢40) = GH¢3,200 (1 mark)
Selling Overhead

At 75% (AL) = GH¢10,000/75 = GH¢133.33; At 85% AL = 11,000/85 = GH¢129.41; At
95% AL = GH¢12,000/95 = GH¢126.32. Thus, selling overhead cost is a mixed cost. It
changes at both total and activity level.
Therefore, using high-low method the separation would be done as follows:
VC/unit = (GH¢12,000 – GH¢10,000)/(95% – 75%) = GH¢2000/20 = GH¢100 per 1%
Fixed Cost (Using highest activity level) = 12,000 – (95 x GH¢100) = GH¢2,500 (1 mark)
Administration Overhead
This is a fixed cost. It remained constant over all activity level. (0.5 mark)

(Any 18 ticks @ 1/3 = 6 marks)