- 15 Marks
Question
a. Egoyibo Nigeria Limited is a company which produces a single product on an assembly line. The budget personnel has been availed with the following information which represents the extremes of high and low volumes of production which the company will achieve over a three month period.
| Production of | Production of |
|---|---|
| 80,000 units | 160,000 units |
| N | N |
| Direct materials | 6,400,000 |
| Indirect materials | 960,000 |
| Direct labour | 4,000,000 |
| Power | 1,440,000 |
| Repairs | 1,600,000 |
| Supervision | 1,600,000 |
| Rent, insurance and rates | 720,000 |
Additional information: Supervision is a “step function”. To this end, one supervisor is employed for all production levels up to and including 100,000 units. For higher levels of production, an assistant supervisor whose remunerations is N1,280,000 will be added.
Required:
Prepare a set of flexible budgets for presentation to the Production Director to cover the following levels of production over a period of three months:
(i) 80,000 Units
(ii) 100,000 Units
(iii) 120,000 Units
(iv) 140,000 Units
(v) 160,000 Units (9 Marks)
b. During the three months July to September 2024, 100,000 units were produced. Actual costs incurred during this period were as follows:
N Direct materials 8,300,000 Indirect materials 1,160,000 Direct lbour 5,400,000 Power 1,520,000 Repairs 1,770,000 Supervision 1,700,000 Rent, insurance and rates 640,000
Required:
(i) Prepare a budget report for presentation to the Production Director displaying all relevant variances. (3 Marks)
(ii) For each variance, suggest any further investigations which might be required and necessary actions needed to be taken by the Director. (3 Marks)
Answer
a. Flexible Budget for 3 months
| Particulars | 80,000 | 100,000 | 120,000 | 140,000 | 160,000 |
|---|---|---|---|---|---|
| N„000 | N„000 | N„000 | N„000 | N„000 | |
| Variable Costs: | |||||
| Direct materials | 6,400 | 8,000 | 9,600 | 11,200 | 12,800 |
| Indirect materials | 640 | 800 | 960 | 1,120 | 1,280 |
| Direct labour | 4,000 | 5,000 | 6,000 | 7,000 | 8,000 |
| Power | 480 | 600 | 720 | 840 | 960 |
| Repairs | 800 | 1,000 | 1,200 | 1,400 | 1,600 |
| Total variable cost | 12,320 | 15,400 | 18,480 | 21,560 | 24,640 |
| Fixed Costs: | |||||
| Indirect material | 320 | 320 | 320 | 320 | 320 |
| Power | 960 | 960 | 960 | 960 | 960 |
| Repairs | 800 | 800 | 800 | 800 | 800 |
| Supervision | 1,600 | 1,600 | 2,880 | 2,880 | 2,880 |
| Rent, insurance and rates | 720 | 720 | 720 | 720 | 720 |
| Total fixed costs | 4,400 | 4,400 | 5,680 | 5,680 | 5,680 |
| Total cost | 16,720 | 19,800 | 24,160 | 27,240 | 30,320 |
Working
| Particulars | 80,000 | 100,000 | 120,000 | 140,000 | 160,000 | Cost analysis |
|---|---|---|---|---|---|---|
| N‟000 | N‟000 | N‟000 | N‟000 | N‟000 | ||
| Direct material | 6,400 | 8,000 | 9,600 | 11,200 | 12,800 | Variable cost |
| Indirect material | 960 | 1,120 | 1,280 | 1,440 | 1,600 | Semi-variable cost |
| Direct Labour | 4,000 | 5,000 | 6,000 | 7,000 | 8,000 | Variable cost |
| Power | 1,440 | 1,560 | 1,680 | 1,800 | 1,920 | Semi-variable cost |
| Repairs | 1,600 | 1,800 | 2,000 | 2,200 | 2,400 | Semi-variable cost |
| Supervision | 1,600 | 1,600 | 2,880 | 2,880 | 2,880 | Step cost |
| Rent/insurance/rates | 720 | 720 | 720 | 720 | 720 | Fixed cost |
Using High –Low method analysis of semi-variable costs: Indirect Material Variable cost Per unit = 1,600,000 – 960,000 = 640,000 160,000 – 80,000 80,000 = N8 per unit Fixed Cost = using lowest activity it will be FC = Total cost – VC (Activity Level) = (960,000 – 8(80,000) = 960,000 – 640,000) = N320,000 Power variable cost per unit = N1,920,000 – N1,440,000 = 480,000 = N6
80,000 80,000 Fixed cost = 1,920,000 – 6 x 160,000 = N960,000 Supervision (variable cost) = 2,880,000 – 1,600,000 = 1,280,000 = N16
80,000 80,000 Fixed cost = 2,880,000 – 16(160,000) 2,880,000 – 2,560,000 = N320,000 Repair Variable cost = 2,400,000 – 1,600,000 = 800,000 = N10
80,000 80,000 Fixed cost = N2,400,000 – 10 x (160,000) = N800,000
Specify each cost type based on activity
| S/N | Particulars | Cost analysis (Cost type based on activity) |
|---|---|---|
| 1. | Direct material | Variable cost |
| 2. | Indirect material | Semi-variable cost |
| 3. | Direct Labour | Variable cost |
| 4. | Power | Semi-variable cost |
| 5. | Repairs | Semi-variable cost |
| 6. | Supervision | Step cost |
| 7. | Rent/insurance/rates | Fixed cost |
b. Budget report from July to Sept 2024 at 100,000 units showing variances:
| S/N | Particulars | Variable Cost | Fixed cost | Total budgeted Cost | Actual | Variance |
|---|---|---|---|---|---|---|
| N‟000 | N‟000 | N‟000 | N‟000 | N‟000 | ||
| 1. | Direct material | 8,000 | – | 8,000 | 8,300 | 300 A |
| 2. | Indirect material | 800 | 320 | 1,120 | 1,160 | 40 A |
| 3. | Direct labour | 5,000 | – | 5,000 | 5,400 | 400 A |
| 4. | Power | 600 | 960 | 1,560 | 1,520 | 40 F |
| 5. | Repairs | 1,000 | 800 | 1,800 | 1,770 | 30 F |
| 6. | Supervision | – | 1,600 | 1,600 | 1,700 | 100 A |
| 7. | Rent, Insurance/Rates | – | 720 | 720 | 640 | 80 F |
Where A = Adverse variance and F = favourable variance
c. Further investigations on the variances and measures/actions needed to be taken by director.
| S/n | Variance | Variance amount | Investigations and measures to be taken on the variances |
|---|---|---|---|
| 1 | Direct material cost variance | N300,000 A | There exist a N300,000 adverse variance which could be as a result of price and usage of materials. High actual direct material price, wastage, poor quality of materials, and loss in production. Management is expected to conduct price and market survey, ensure high quality low priced materials are procured and used, handling of materials to reduce wastage to be improved. |
| 2 | Indirect material cost variance | N40,000 A | There is a N40,000 adverse variance for indirect material which could be as a result of price and usage of such materials, wastage, poor quality of such materials. Management is expected to conduct price and market survey, ensure high quality low priced materials are procured and used, handling of such materials to reduce wastage. |
| 3 | Direct Labour cost variance | N400,000 A | An adverse variance of N400,000 was observed. This could arise from direct labour rate and efficiency variances. The variance could be attributable to high labour rates, inefficient operations and excessive overtime. Management can control same through appropriate labour pricing, effective job evaluation and manpower planning |
| 4 | Power overhead cost variance | N40,000F | There is a favourable variance of N40,000 which could be due to decrease in power rates. There is need for investigation to ensure appropriate and realistic figure is used for budgeting purposes in future. |
| 5 | Repairs expenses cost variance | N30,000F | An favourable variance of N30,000 was noticed. It may mean that maintenance programme of equipment was not only adhered to but surpassed. An favourable variance of N30,000 means that there is need for investigation to ensure appropriate figure (realistic figures) are used for budgeting purposes in future. |
| 6 | Supervision cost variance | N100,000A | There is adverse variance of N100,000 which could be due to increase in cost of supervision. There is need for investigation to ensure appropriate figure is used for budgeting purposes in future. |
| 7 | Rent, insurance and Rates cost Variances | N80,000F | There is a favourable variance of N80,000 which could be due to decrease in rates. There is need for investigation to ensure appropriate figure is used for budgeting purposes in future. |
- Tags: Budget Report, Cost behavior, Flexible Budget, Investigations, Step Costs, Variance Analysis
- Level: Level 2
- Topic: Budgeting and Budgetary Control
- Series: MAY 2025
- Uploader: Samuel Duah