Question Tag: Flexed Budget

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  • 20 Marks

IMAC – NOV 2021 – L1 – Q2 – Budgeting

Preparation of a flexed budget for Nam & Co. and identification of rules in a budget manual.

Notes:
i) The fixed cost in the semi-variable cost is GH¢10,000.
ii) The budgeted units were 10,000, but actual units for the quarter were 17,000.

Required:
Prepare a Flexed Budget for the first quarter. (15 marks)

b) In the budget preparation process, the Budget Manual is an important element. This is because it guides everyone in the budget preparation value chain.

Required:
Identify FIVE (5) rules and instructions that a Budget Manual will set out. (5 marks)

b) Budget manual may set out the following:

  1. Key objectives
  2. Planning procedures
  3. Instructions about budget details
  4. Responsibilities for preparation of functional budgets
  5. Approval process
  6. Key budget factors (Any 5 points @ 1 mark each = 5 marks)
  • 20 Marks

IMAC – NOV 2021 – L1 – Q1 – Budgeting

CVP analysis with calculation of contribution/sales ratio, total fixed costs, and breakeven sales value. Preparation of a flexed budget and identification of budget manual rules.

a) Cost-Volume-Profit (CVP) analysis is a way to find out how changes in variable and fixed costs affect a firm’s profit. Companies can use CVP to assess the impact on profit taking into consideration some assumptions.

Required:
State FIVE (5) assumptions underlying Cost-Volume-Profit Analysis. (5 marks)

b) The following data has been extracted from the operating records of Sharp Production Ltd:

Year Costs (GH¢) Profit (GH¢)
2019 402,000 54,000
2020 510,000 90,000

Required: i) Calculate the contribution/sales ratio for the company. (5 marks) ii) Compute the total fixed costs per annum. (5 marks) iii) Compute the sales value required to breakeven. (5 marks)

 

a) Assumptions underlying CVP Analysis:

  1. All costs can be conveniently segregated into fixed and variable elements.
  2. Total fixed costs remain constant while variable costs vary proportionately with the level of activity.
  3. The selling price per unit is given and remains constant over the relevant range of activity.
  4. All that is produced can be sold at the prevailing price.
  5. The only factor affecting costs and revenues is the volume of activity.
  6. Technology, production methods, and efficiency remain unchanged.
  7. There are no inventory level changes, or inventories are valued at marginal cost.
  8. There is no uncertainty.
  9. A single product or a constant product mix is produced and sold. (Any 5 points @ 1 mark each = 5 marks)

b) Workings:

Year Cost (GH¢) Profit (GH¢) Revenue (GH¢)
2019 402,000 54,000 456,000
2020 510,000 90,000 600,000
Revenue Cost
High 600,000
Low 456,000
Change 144,000

 

ii) Computation of Total Fixed Costs:

Year Revenue (GH¢) TC (GH¢) TVC (GH¢) TFC (GH¢)
2019 456,000 402,000 342,000 60,000
2020 600,000 510,000 450,000 60,000

Alternatively: Using higher sales level: Contribution = 0.25 x GH¢600,000 = GH¢150,000 Profit = contribution – FC GH¢90,000 = GH¢150,000 – FC This implies FC = GH¢60,000 (5 marks)

 

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