XYZ Co. is preparing a budget for 2018. The budgeted selling price per unit is 6

Question

XYZ Co. is preparing a budget for 2018. The budgeted selling price per unit is 60 SR, and total fixed costs for 2018 are estimated to be 1,500,000 SR. Variable costs are budgeted at 20 SR/unit.

You are working in accounting department of XYZ, prepare a flexible budget for the volume levels 120,000, 130,000, and 140,000 units.

One internship student having his training in XYZ Co requested you to explain to him the difference between static and flexible budgets and arguments of using each one of them?

Explanation / Answer

Solution:-

1. Flexible budget

2. Difference between static and flexible budgets:-

Following are the main differences between static and flexible budget:

1. Nature:- A static budget does not change with the actual volume of the output achieved. A flexible budget is designed to change appropriately with the level of activity attained.

2. Scope:- A static budget cannot ascertain costs correctly in case of any change in circumstances. Flexible budget can easily ascertain costs in different levels of activities.

3. Determination Of Cost:- Static budget is prepared under the assumption that all conditions will remain unaltered. Flexible budget is prepared at different levels of activities considering the possible changes in the operational aspect of a business.

4. Assumptions:- Static budget has a limited application and is ineffective as a tool for cost control. Flexible budget has a wide application as an effective tool for cost control.

5. Pre-requistes:- Static budget is prepared without classifying the costs according to their variable nature. Flexible budget is prepared by classifying the costs according to their variable nature.

Please Rate or comment if you have any doubt regarding this solution.

120,000 units 130,000 units 140,000 units Sales price 7,200,000 7,800,000 8,400,000 Less variable cost 2,400,000 2,600,000 2,800,000 Contribution 4,800,000 5,200,000 5,600,000 Less fixed cost 1,500,000 1,500,000 1,500,000 Net profit 3,300,000 3,700,000 5,000,000

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