The budgets for activity and cost of PQR Ltd. for the first three quarters of operation are shown below: Period Covered Budgets Quarters I – III…

CA Intermediate · Cost and Management Accounting · RTP · May 2025
The budgets for activity and cost of PQR Ltd. for the first three quarters of operation are shown below: Period Covered Budgets Quarters I – III Months Q-1 1-3 ('000) Q-II 4-6 ('000) Q-III 7-9 ('000) Activity: Sales (Units) 9 17 15 Production (Units) 10 20 15 Costs (₹) : Direct Material A 60 120 90 B 50 100 75 Production Labour 180 285 230 Manufacturing Overheads Excluding Depreciation 90 120 105 Depreciation of Production Machinery 20 20 20 Administration Expenses 25 25 25 Selling & Distribution Expenses 38 54 50 The figures shown above represent the costs structure of PQR Ltd., which have the following major features: (i) Fixed element of any cost is completely independent of activity levels. (ii) Any variable element of each cost displays a linear relationship with activity level, except that the variable labour cost become 50% higher for activity in excess of 19,000 units per quarter due to the necessity for overtime working. (iii) The variable element of selling and distribution expenses is a function of sales. All other costs with a variable element are a function of production volume. Activity for each quarter is spread evenly throughout that quarter. In Quarter IV Production level will be set equal to sales level. Production and sales in this quarter are expected to range between 15,000 units and 21,000 units. The most likely volume is 18,000 units. In month 9 it will be possible to accurately estimate the sales for Quarter IV. Cost structure will remain the same as in Quarters I to III except the following: (i) Labour cost will rise by 121/2%. (ii) Variable labour input per unit of output will decrease, due to learning curve effect, such that 80% of the previous labour input per unit of output will be required in Quarter IV. The threshold for overtime working remains at 19,000 units per quarter. (iii) Fixed factory overheads and the fixed element of selling and distribution costs will each rise by 20% (The variable element of selling and distribution costs will be unaltered.) Required (i) PREPARE a Statement to show, under each cost classification given in the budgets, the variable cost per unit and fixed costs which will be effective in Quarter IV. (ii) PREPARE a flexible budget of production costs for the Quarter IV.

Suggested Answer and Working Notes:

(i) Statement of Variable Cost per unit and Fixed Costs under Given Cost Classification Effective for Quarter IV Particulars Total Fixed Cost (₹) Variable Cost p.u. (₹) Direct Materials (W.N.1) A --- 6 B --- 5 Production Labour (W.N.2) 90,000 9 Manufacturing Overhead Ex. Depreciation (W.N.3) 72,000 3 Depreciation of Production Machinery 20,000 ---- Administration Expenses 25,000 ---- Selling & Distribution Expenses (W.N.4) 24,000 2 (ii) Flexible Budget of Production Costs for the Quarter IV Particulars 15,000 units (₹) 18,000 units (₹) 21,000 units (₹) Direct Material A 90,000 (15,000 units × ₹ 6) 1,08,000 (18,000 units × ₹ 6) 1,26,000 (21,000 × ₹ 6) B 75,000 (15,000 units × ₹ 5) 90,000 (18,000 × ₹ 5) 1,05,000 (21,000 units × ₹ 5) Production Labour 2,25,000 (15,000 units x 9 + 90,000) 2,52,000 (18,000 units × ₹ 9 + 90,000) 2,88,000* Manufacturing Overhead 1,17,000 (15,000 units x 3 +72,000) 1,26,000 (18,000 units × ₹ 3 +72,000) 1,35,000 (21,000 units × ₹ 3 +72,000) Depreciation 20,000 20,000 20,000 Total Production Cost 5,27,000 5,96,000 6,74,000 * Production Labour (21,000 units level): Variable Cost (21,000 units × 9) = 1,89,000 Fixed Cost = 90,000 Overtime (2,000 units × 9 × 0.50) = 9,000 Total Production Labour Cost = 2,88,000 Working Notes 1. Direct Material Cost: A:60,000 / 10,000 units = 6 B:50,000 / 10,000 units = 5 Direct material cost (variable cost) for material A and B for all the quarters on computation comes to 6 /- and - 5/- for materials A and B respectively. 2. Fixed and Variable Cost Component of production labour cost: Particulars Quarter I Quarter III Change Production (units) 10,000 15,000 5,000 Production labour (₹) 1,80,000 2,30,000 50,000 Variable Cost (per unit) = Change in Production Labour Cost / Change in Production Units Change in Production units = 50,000 / 5,000 = 10 Fixed Cost = 1,80,000 - 1,00,000 = 80,000 For Quarter II (20,000 units): Variable Cost of 20,000 units @ 10 p.u. = 2,00,000 Fixed Cost = 80,000 Overtime Premium on 1,000 @5 p.u. = 5,000 Total Production Labour Cost = 2,85,000 For Quarter IV (18,000 units): Variable Cost of 18,000 units @ 9 p.u. = 1,62,000 (₹ 10 × 1.125 × 0.80 = 9) Fixed Cost (₹ 80,000 × 1.125) = 90,000 Total Production Labour Cost = 2,52,000 3. Fixed and Variable Cost Component of manufacturing overhead: Quarter I Quarter II Change Production (units) 10,000 20,000 10,000 Manufacturing Overhead (₹) (Excluding Depreciation) 90,000 1,20,000 30,000 Variable Cost Component of manufacturing overhead: = Change in Manufacturing Overhead Costs / Change in Production Units = 30,000 / 10,000 units = 3 p.u Fixed Cost Component of manufacturing overhead: = 1,20,000 – 20,000 units × 3 = 60,000 For Quarter IV: Fixed Cost = 60,000 Add: 20% Increase = 12,000 Total Fixed Cost = 72,000 4. Fixed and Variable Cost Component of selling and distribution expenses Quarter I Quarter II Change Sales (units) 9,000 17,000 8,000 Selling & Distribution Expenses 38,000 54,000 16,000 Variable Cost Component of selling & distribution expenses: = Change in selling & Distribution expenses / Change in sales units = 16,000 / 8,000 = 2 per unit Fixed Cost Component of selling & distribution expenses: = 54,000 – 17,000 units × 2 = 20,000 Fixed Cost Component for IV Quarter: = 20,000 × 1.20 = 24,000

Topics: Budgets and Budgetary Control

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