Q 3 XYZ Co. is preparing a budget for 2018. The budgeted selling price per unit
ID: 2598400 • Letter: Q
Question
Q 3 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
Since the original budget unit is not given in the question, i am solving it using an assumption of unit 100,000 as the original budget units on which Selling price is based. Kindly let me know in case you find any difficulty.
Budget for XYZ Co. for the year 2018 Unit level 100000 120000 130000 140000 per unit Total per unit Total per unit Total per unit Total Selling Price 60 6000000 60 7200000 60 7800000 60 8400000 Variable Cost 20 2000000 20 2400000 20 2600000 20 2800000 Conribution 40 4000000 40 4800000 40 5200000 40 5600000 Less : Fixed cost 15 1500000 13 1500000 12 1500000 11 1500000 Operating Proft 2500000 3300000 3700000 4100000 Workings Selling price at 120000 = (60/100000)*120000 = 72 Variable cost at 120000 = (20/100000)*120000 = 24 Note that total Fixed cost remains the same throughout all levels but Fixed cost per unit decreases as the level increases The selling cost and variable cost per unit remains constant in all levels. However total Sales and Variable cost changes with change in levels The basic difference between static and flexible budget is that static budget remains constant at any volume of activity whereas flexible budget adjusts itself according to the level/volume of activity Static budget can be useful for a monopoly form of market where the sales and expenses are predictable. It serves as a master budget or a base for preparing budget for corporations Flexible budget is useful where sales and cost fluctuate and not at all predictable. It adjusts itself according to the volume of activity a company is in, hence ddeviations can be calculation from actual numbersRelated Questions
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