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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

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 labour

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 labour increases by 50 per cent. 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 fi xed 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.

Jun 19 2020 View more View Less

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