Question

You suggest that the Villige Pharmacy should use a flexible budget to assist decision making, planning and control.

The company expects to issue prescriptions 20,000 over the coming year.  

Assuming that the first 10,000 prescriptions require 0.10 direct labour hours to dispense and the remainder require 0.15 direct labour hours and that overheads are absorbed on the basis of direct labour hours.

The budgeted semi-variable costs for each of the four overhead items are split as follows:

	Fixed Cost	Variable Cost
Communications / telephone	£ 1,000	£0.025
Security	£ 5,000	£0.04
Indirect labour	£ 8,000	£2.00
Insurance	£12,000

1. Prepare an overhead budget for the expected activity level for the coming year.

2. Prepare an overhead budget that reflects activity that is 10 per cent higher than expected.

Answer 1

Answer (a):

The company expects to issue prescriptions 20,000 over the coming year.  

Assuming that the first 10,000 prescriptions require 0.10 direct labour hours to dispense and the remainder require 0.15 direct labour hours

Total Budgeted DLH = 10000 * 0.10 + 10000 * 0.15 = 2,500 DLH

Based on budgeted DLH of 2,500, overhead budget us prepared as below:

Answer (b):

If prescriptions are 10% higher, then total budgeted prescriptions = 20,000 + 10% * 20000 = 22,000

Total Budgeted DLH = 10000 * 0.10 + 12000 * 0.15 = 2,800 DLH