With the exception of depreciation, all fixed and semi-variable overheads will increase by
5% with effect from 1 January 2005.
(a) Prepare flexible budgets for monthly output levels of 55,000 and 65,000 units for
the year ended 31 December 2005.
(b) Explain the principal benefits that firms obtain from the preparation of flexible
2. Great Lakes Co. is about to commence the final quarter of activity for the current
financial year. The results for the first three quarters of the year have been as
1. Drum Ltd. makes a single product, using a process involving stamping a circle out
from sheet steel, covering it with hide and attaching it to a sidepiece.
For 2004 the standard materials costs and requirements have been as follows: 0.4
square metres of sheet steel at £5.20 per square metre; 0.8 square metres of hide at £9.20
per square metre; sidepiece at £4.20. Price increases relating to these raw materials have
been notified for the year 2005. Sheet steel will fall in price by 10%, whilst hide will
increase in price by 10% and the sidepiece will cost £5.
It takes 30 minutes of labour to punch out the metal, cut the hide and complete the
assembly of the product. Labour currently costs the company £4 per hour, and this will
increase by 4% with effect from 1 January 2005.
Semi-variable overheads measured at different levels of output in 2004 were:
(i) The variable elements of production costs are related to the volume of production.
The variable element of selling and distribution costs is related to the volume of
(ii) During the fourth quarter of the year sales volume is expected to range between
18,000 and 24,000 units; production will be set equal to sales in the quarter. The
company has been informed that the unit price of materials will increase by 8%
in the fourth quarter.
(iii) For the whole of the year the selling price is £30 per unit.
Prepare flexible budgets for the final quarter at production (and sales) levels of 18,000
and 24,000 units. Forecast the profit at these sales levels.
3. Omega PLC manufactures a product for which the standard cost data are as follows:
THE CONTROL PROCESS – 1 183
The budget for the month of April was set at an output of 5000 units and a total cost of
The actual output and costs for the month of April were as follows:
Actual output 4800 units
Actual costs (£)
Direct materials (14,480 kg) 73,656
Direct labour (9700 DIH) 38,800
Variable overhead 18,960
Fixed overhead 99,000
Total costs £230,416
(a) Calculate the following variances and associated subvariances for April: total
cost; Direct material; Direct labour; Variable overhead; Fixed overhead.
(b) Interpret the information provided by the fixed overhead variances in this case.
The production manager has expressed concern that the total costs seem to be running at
too high a level against budgeted costs forecast at the start of the year. You work in the
finance department, and the production manager has approached you to see if you can
analyse the causes of the problem.
(a) Calculate the budgeted standard cost of one Trimouse.
(b) Prepare a statement analysing the high level of costs that are worrying the production manager using appropriate materials, labour and overhead variances.