Lawrence Ltd operates a system of flexible budgets and the flexed budgets for expenditure for the first
Question:
Lawrence Ltd operates a system of flexible budgets and the flexed budgets for expenditure for the first two quarters of year 3 were as follows:
Flexed budgets – quarters 1 and 2
| Quarter 1 | Quarter 2 |
Activity |
|
|
Sales units | 9,000 | 14,000 |
Production units | 10,000 | 13,000 |
Budget cost allowances | £ | £ |
Direct materials | 130,000 | 169,000 |
Production labor | 74,000 | 81,500 |
Production overhead | 88,000 | 109,000 |
Administration overhead | 26,000 | 26,000 |
Selling and distribution overhead | 29,700 | 36,200 |
Total budget cost allowance | 347,700 | 421,700 |
Despite a projected increase in activity, the cost structures in quarters 1 and 2 are expected to continue during quarter 3 as follows:
(a) The variable cost elements behave in a linear fashion in direct proportion to volume. However, for production output in excess of 14,000 units the unit variable cost for production labor increases by 50 percent. This is due to a requirement for overtime working and the extra amount is payable only on the production above 14,000 units.
(b) The fixed cost elements are not affected by changes in activity levels.
(c) The variable elements of production costs are directly related to production volume.
(d) The variable element of selling and distribution overhead is directly related to sales volume.
You are required to prepare a statement of the budget cost allowances for quarter 3 when sales were 14,500 units and production was 15,000 units.
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