Flexible Budgets
Practice As You Learn
Follow these steps when you are asked to prepare a flexible budget or calculate income
for a given level of sales.
1) Write down the format: Usually you will have more than one type of variable cost and fix costs so you should leave room for more than one variable cost or fixed cost
Write the different sales volume levels in columns across the top (above the sales line).
Volume Volume
Sales
– Variable costs
= Contribution margin
– Fixed Costs
= Operating Income
2) Multiple the sales price per unit x each volume to get total sales for each column
3) Identify each type of variable cost and the cost per unit for each.
You may have to divide the total cost given by the units given to get a cost per unit.
The cost per unit will be the same regardless of what the volume is.
Multiply the volume in the column by the cost per unit for each variable cost and put that in each column
4) Identify each type of fixed cost.
The amount will be the same for each column of volume.
Fixed costs remain constant as volume changes
Flexible Budgets – Practice as You Learn Problem 1.
Juco, Inc. would like to know estimated income at sales volumes of 5,000 and 10,000, and 15,000 units sold. The product sells for $20. They have estimated their direct manufacturing costs at $5 per unit. Variable manufacturing overhead is estimated to be $2 per unit.
Fixed manufacturing costs are $27,000. Fixed general and administrative costs are $18,000. Fixed selling costs are $8,000 and variable selling costs are $0.50 per unit.
Prepare a flexible budget for all sales volumes listed above. Do not look at the answers until
you are completely finished. If you do, you will not know what you did not know how to do.
Answer
Important:
The variable cost per unit does not change. The total variable cost does change.
The fixed cost in total does not change. If you were to calculate a fixed cost per unit (total cost / volume), the cost per unit is less as volume is higher.
Contribution margin is the amount you get from selling the product that is available to pay for fixed costs. As contribution margin increases, income increases because the fixed costs stay the same.
| Sales Volumes |
5,000
|
10,000
|
15,000
|
| Sales |
$100,000
|
$200,000
|
$300,000
|
| – Variable Costs |
|
|
|
| Direct manufacturing ($5) |
25,000
|
50,000
|
75,000
|
| Variable Overhead ($2) |
10,000
|
20,000
|
30,000
|
| Selling ($0.50) |
2,500
|
5,000
|
7,500
|
|
|
|
|
|
| = Contribution Margin |
62,500
|
125,000
|
187,500
|
|
|
|
|
|
| – Fixed Costs: |
|
|
|
| Manufacturing |
27,000
|
27,000
|
27,000
|
| General & Admin |
18,000
|
18,000
|
18,000
|
| Selling |
8,000
|
8,000
|
8,000
|
|
|
|
|
|
| Income Before Tax |
9,500
|
72,000
|
134,500
|
Flexible Budgets – Practice as You Learn Problem 2.
Juco, Inc. would like to know estimated income at sales volumes of 8,000 and 10,000, and 15,000 units sold. When 5,000 were sold, the company’s total sales dollars were $100,000.
Estimated total direct manufacturing costs are $25,000 for 5,000 units. Total variable manufacturing overhead is estimated to be $10,000 for 5,000 units. Fixed manufacturing costs are $27,000, fixed general and administrative costs are $18,000, and fixed selling costs are $8,000 for 5,000 units. When 5,000 units are sold the company incurs $2,500 in variable selling costs.
Prepare a flexible budget for all sales volumes listed above. Do not look at the answers until
you are completely finished. If you do, you will not know what you did not know how to do.
Answer
| Sales Volumes |
8,000
|
10,000
|
15,000
|
| Sales |
$160,000
|
$200,000
|
$300,000
|
| – Variable Costs |
|
|
|
| Direct manufacturing ($5) |
40,000
|
50,000
|
75,000
|
| Variable Overhead ($2) |
16,000
|
20,000
|
30,000
|
| Selling ($0.50) |
4,000
|
5,000
|
7,500
|
|
|
|
|
|
| = Contribution Margin |
100,000
|
125,000
|
187,500
|
|
|
|
|
|
| – Fixed Costs: |
|
|
|
| Manufacturing |
27,000
|
27,000
|
27,000
|
| General & Admin |
18,000
|
18,000
|
18,000
|
| Selling |
8,000
|
8,000
|
8,000
|
|
|
|
|
|
| Income Before Tax |
47,000
|
72,000
|
134,500
|
Important to notice:
The sales price per unit is not given. You have to divide total sales dollars of $100,000 by 5,000 units sold to get the sales price of $20 per unit.
The cost per unit is not given. You have to calculate it by dividing the total cost given for the number of units given (5,000) to determine the cost per unit.
You need the cost per unit for variable costs only and this cost per unit will be the same regardless of the volume of units.
Fixed costs are the same regardless of what the volume is, within a relevant range.
Assume for this problem that you have not gone out of the relevant range. If you do go out of the relevant range, fixed costs will not go up the same percentage that sales volume increases, there is not a direct relationship.
You must first get the sales price per unit and all variable costs per unit. Then follow the 4 steps.