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Liloth’s Company deals in authentic African bitters. For the financial year 2019, the cost accountant provided...

Liloth’s Company deals in authentic African bitters. For the financial year 2019, the cost accountant provided the following budgeted information. At full capacity (100% level of activity), the company produces an output of 20,000 units.

Level of Activity

70% 80% 90%

Direct Material (GHc) 88900 101600 114300

Direct labour (GHc) 224000 256000 288000

Production Overheads (GHc) 152500 160000 167500

Administrative Overheads (GHc) 85000 85000 85000

Depreciation (GHc) 20000 20000 20000

During June, the company’s activity level was anticipated to be around 85% activity level

Prepare a flexible budget for the anticipated activity level.
Explain the relevance of an activity variance for expenses for management decision making purposes

Expert Solution

1) Flexible Budget :-

Particulars	Calculation	Per unit Cost/Cost Nature	85% Activity Level
Production	(20000*85%)		17000 units
Direct Material	(($88900/(2000070%))17000)	$6.35 / Variable	$107950
Direct Labour	(($224000/(2000070%))17000)	$16 / Variable	$272000
Production Overheads	Working Note 1	$3.75 / Variable and $100000 fixed	163750
Administration Overheads		Fixed	$85000
Depreciation		Fixed	$20000
Total Cost			$648700

Working Note 1 :-

Variable Production Overheads = ($152500 - $160000)/(14000-16000)

= $7500 / 2000

= $3.75 per unit

Fixed Production Overheads at 70% Activity Level = $152500 - ($3.75*14000)

= $152500 - $52500

= $100000

As per above Calculation Direct Material and Direct Labour Cost are Variable Cost and Production Overheads is Semi-Fixed.

Administrative Overheads and Depreciation are Fixed Cost.

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ekkarill92 answered 1 year ago

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