Example 1

Wye Ltd manufactures one product and when operating at 100% capacity can produce 5,000
units per period, but for the last few periods has been operating below capacity.
Below is the flexible budget prepared at the start of last period, for three levels of activity at
below capacity:
Level of activity
70% 80% 90%
$ $ $
Direct materials 7,000 8,000 9,000
Direct labour 28,000 32,000 36,000
Production overheads 34,000 36,000 38,000
Administration, selling and
distribution overheads 15,000 15,000 15,000
–––––––– –––––––– ––––––––
Total cost 84,000 91,000 98,000
–––––––– –––––––– ––––––––
In the event, the last period turned out to be even worse than expected, with production of only
2,500 units. The following costs were incurred:
$
Direct materials 4,500
Direct labour 22,000
Production overheads 28,000
Administration, selling and distribution
overheads 16,500
––––––––
Total cost 71,000
––––––––
Required:
Use the information given above to prepare the following.
(a) A flexed budget for 2,500 units.
(b) A budgetary control statement.
Example 2
A company has prepared the following fixed budget for the coming year.
Sales 10,000 units
Production 10,000 units
$
Direct materials 50,000
Direct labour 25,000
Variable overheads 12,500
Fixed overheads 10,000
$97,500
Budgeted selling price $10 per unit.
At the end of the year, the following costs had been incurred for the actual production of 12,000
units.
 $
Direct materials 60,000
Direct labour 28,500
Variable overheads 15,000
Fixed overheads 11,000
$114,500
The actual sales were 12,000 units for $122,000
Required
a. Prepare a flexed budget for the actual activity for the year
b. Calculate the variances between actual and flexed budget, and summarise in a form
suitable for management.