C39MT1 Workshop Exercise: Flexible Budgets

Question and Outline Solution

Rob Hardgrave, the managing partner of Aztec Furnishings has become aware of the
disadvantages of static budgets. He asks you to prepare a flexible budget for December
2013 for the main style of hardwood blanket box. He has given you the following partial data
for actual operations in October 2013 (a recent typical month):

Oct-13
Blanket boxes produced and sold
Direct material costs
Direct manufacturing labour costs
Depreciation and other fixed manufacturing
costs
Average selling price
Fixed marketing costs

4,500 units
90,000.00
67,500.00
50,700.00

70.00
81,350.00

Notes:
Assume no opening stock or closing stock.
A 10% increase in the selling price is expected in December.
The only variable marketing cost is a commission of 5.50 per unit paid to the
manufactures representatives, who bear all their own costs of travelling, entertaining
customers, and so on. A patent royalty of 2.00 per blanket box manufactured is paid
to an independent design firm.
Salary increases that will become effective in December are 12,000 per year for the
production supervisor and 15,000 per year for the sales manager.
A 10% increase in direct material prices is expected to become effective in
December.
No changes are expected in direct manufacturing labour wage rates or in the
productivity of the direct manufacturing personnel.
Aztec Furnishings uses a normal costing system and does not have standard costs
for any of its inputs.
Required:
a) Using the flexible-budget approach of developing budgeted revenue and variable
costs on a budgeted per output unit basis, prepare a flexible budget for December
2013, showing budgeted amounts at each of three output levels of blanket boxes:
4000, 5000 and 6000 units.

Flexible budget data for Aztec Furnishings for December 2013

Budgeted

Revenues*

Amount
per Unit

77.00

Variable costs
Direct materials**

Alternative levels of output in

units
4000
5000
6000

308,000

22.00

Direct manufacturing labour***

88,000

15.00

Variable manufacturing overhead

60,000

2.00
Variable marketing cost****

Contribution margin

27,500

178,000

51,700

Workings
* 70 + 10% (70) = 77
**90,000/4500=20/10% (20)= 22
***67,500/4500=15
****Info Given
#50,700
=
(12,000/12)=50700=1000=51,700
##81,350=(15,000/12)=81,350=1250=8260
0

51,700

82,600

Operating profit (loss)

162,500

Marketing and administration##

Total costs

222,500

130,000

Fixed costs
Manufacturing#

Total fixed costs

32.50

10,000

22,000

44.50

132,000

90,000

12,000

33,000

267,000

195,000

75,000

8,000

5.50
Total variable costs****

462,000

110,000

385,000

51,700

82,600

82,600

134,300
134,300
134,300

312,300
356,800
401,300
-

4,300
28,200
60,700

b) Explain why Aztec Furnishings may find a flexible budget more useful than a static
budget.
A flexible budget enables Aztec Furnishings to calculate a richer set of variances than does a
static budget. Aztec will be able to calculate a flexible budget variance and a sales volume
variance. These additional variances provide more insight into why actual results differ from
budgeted amounts.
Total: 35 marks