BASIC COST ACCOUNTING

150 BASIC COST ACCOUNTING

II. EXAMPLE OF A FLEXIBLE BUDGET
o Let's assume a company determines that its cost of electricity
and supplies will vary by approximately RM 10 for each
machine hour (MH) used.
o It also knows that other costs are fixed costs of approximately
RM40 000 per month.
o Typically, the machine hours are between 4,000 and 7,000 hours
per month.
o Based on this information, the flexible budget for each month
would be RM 40 000 + RM10 per MH.
o Now let's illustrate the flexible budget by using different levels of
volume.

JANUARY FEBRUARY MARCH
5,000 MH 6,300 MH 4,100 MH
=RM 40 000 fixed + = RM 40 000 fixed + = RM 40 000 fixed +
RM10 x 5,000 MH RM10 x 6,300 MH RM 10 x 4,100 MH
= RM 90 000 = RM 103 000 = RM 81 000

6.2.2. Differentiate between static budget and flexible budget
STATIC VS FLEXIBLE BUDGETS

STATIC FLEXIBLE

Budgeted amounts are set Adjustment made over the
regardless of changes in year based on volume
variance.
volume over Financial Year
More complicated to
Eg: rent, equipment, full- prepare but more useful
time or permanent staff
and accurate.

Eg: on-call or other variable
staff, medical supplies

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Flexibility STATIC BUDGET/FIXED FLEXIBLE BUDGET
Condition BUDGET
Flexible budget can be
Forecasting Fixed budget is suitably recasted
inflexible and does not quickly according to
Classification of change with the level of activity
costs actual volume of attained.
output achieved. Flexible budget is
Fixed budget assumes design to change
that conditions would according to changed
remain static. conditions.
Realistic and
Based on assumption Practical1
Flexible budget clearly
It is difficult to forecast shows the impact of
accurately the results various expenses on
in it. the operational
aspects of the
Costs are not classified business.
according to their Cost are classified
variability according to the
e.g: fixed, variable and nature of their
semi-variable. variability.

6.2.3. Identify the limitation in static and flexible budget

LIMITATION OF BUDGETING

• In evaluating results the mitigating circumstances are often
ignored. Estimating future costs and events are difficult.
The estimates sometimes may turn out to inaccurate.

• Goals may be set that are difficult to attain.
Effective budgeting required that goals may be difficult but must
be attainable.

• Budgets may be perceived as restricting the accomplishment of
goals and as a pressure device.

• In reality, coordination poses a major problem often leading to
sub-optimal decisions. Rate of inflation and changes in level of
activity may be difficult to foresee.

• Employees whose performance are being controlled do not
come to know how they performed until a performance appraisal
takes place. they get the impression that budgets are used to find
faults with them.

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6.3. Construct the static and flexible budget
6.3.1. Prepare static budget and flexible budget

BASIC STEPS IN PREPARING FLEXIBLE BUDGET
Select the measurement of activity
eg: Production unit, DLH, MH

Define the relevant activity range

Identify the cost item and behavior

Separate the cost item according to variable cost or fixed cost
(mixed cost item must also be separated based on both
categories of costs)

Select the activity level to be budgeted

Estimate the budgeted amount for each cost item at different
activity level

A. Classification of Cost in Flexible Budget
COST BEHAVIOUR

Refers to the situation where cost can be changed if there is a
change output or activities.

3 categories of costs according to behavior:

Variable Cost Fixed Cost Mixed Cost

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VARIABLE Costs that vary according to variation in unit of
COST output.

Example:
raw materials, wages for direct labour,
maintenance expenses, petrol expenses.

FIXED COST Costs that remain fixed or constant although
there are changes in output in a given relevant
range (range of activity or volume)

Example:
1 001 - 2 000 unit output
This means at a range of 2 001 - 4 000 units, Fixed
Cost will be at the different level.

Example: depreciation, insurance, rent for
building, advertising, interest expenses, property
tax.

MIXED COST Combination of Variable Cost and Fixed Cost.

Known as semi-variable costs or semi-fixed costs.

It does not vary propotionately with the volume of
production, and at the same time, it does not remain
constant at different level of activities.

Example:
Payment made to the sales staff
(fixed monthly salary + sales commission)
Rent for utility such as telephone
(fixed monthly rent + call charges)

B. Separation of Mixed Cost

HI LOW METHOD

A way to determine the equation of a straight line which
connects two points;

HIGHEST and LOWEST point.

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STEPS IN HI LOW METHOD

Identify the highest and lowest volume or points

Calculate Variable Cost per unit

• Highest Cost – Lowest Cost
Variable Cost per Unit =

Highest Volume – Lowest Volume

Calculate total Variable Cost with the chosen volume

•
Total Variable Cost = Variable Cost per unit X Volume

Determine total Fixed Cost with the chosen volume

•
Total Fixed Cost = Total Cost - Total Variable Cost

EXAMPLES 6.1

SSF Manufacturing wishes to estimate the fixed and variable costs of

their vase delivery activity based on the following information:

Number of packages Total transportation cost
delivered (RM)

50 2 400
100 3 300
75 2 700
60 2 700
90 3 150
125 3 750

Required:
a. Estimate the fixed and variable component of transportation
costs for the vase using high and low method.
b. Based on the cost formula, estimate the total costs to deliver
70 packages of vase.

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Solution: Identify the highest and lowest volume or points
a.
Highest Lowest
Step 1
Cost 3 750 2 400
Step 2
Volume 125 50
Step 3
Step 4 -

Calculate Variable Cost per unit

Variable Cost = RM 3 750 – RM 2 400

per Unit 125 - 50

RM 1 350
=

75

= RM 18 per unit

-

Total Variable = RM 18 x 100 unit

Cost = RM 1 800

-

Total Fixed = RM 3 300 – RM 1800
Cost = RM 1 500

b. = RM 18 x 70 unit
Total Variable Cost = RM 1 260

Total Fixed Cost = RM 1 500
Total Cost = RM 1 260 + RM 1 500
= RM 2 760
-

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ENRICHEMENT EXERCISE 6.1

Macy Sdn Bhd’s budget manual for the next year includes:
 Full capacity 180 000 direct labour hours.
 Variable costs:

Direct Labour RM 10.30 per direct labour hour
Indirect Labour RM 5.00 per direct labour hour
Indirect Material RM 1.50 per direct labour hour
Other Services 10% of the total of direct and indirect
labour cost per hour.

 Semi variable costs: RM 48 000
RM 62 400
At 120 000 direct labour hour
At 192 000 direct labour hour

 Fixed costs: RM 75 000
RM 45 000
Salaries RM 12 000
Rates RM 30 000
Insurance RM 54 000
Maintenance
Depreciation

Required:

a. Calculate the budget cost allowance, assuming 60 000 direct labour
hours.

b. Prepare a budget for next year, assuming:
i. Full capacity activity
ii. 80% activity

-

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ENRICHEMENT EXERCISE 6.2

Transform Sdn Bhd is aware of the advantages of a Flexible Budget preparation

in planning, control and decision making process. The following basic

information has been provided by the Management Accountant.

Production levels 70% 80%
Production (unit) 262 500 300 000
Cost
RM RM
Direct Material 78 750 90 000
Direct Labour 52 500 60 000
Direct Expenses 25 000 28 000
Manufacturing Overhead 14 125 16 000
Electricity 2 625 3 000
Royalty 7 625 8 000
Commission 2 625 3 000
Salary and supervision 20 000 20 000
Rates 7 000 7 000
Depreciation 10 000 10 000
Administration overhead 12 000 12 000
Selling and distribution 23 375 26 000

Notes:
 The selling price is RM1.20 per unit.
 Salary and supervision would be reduced by 10% if the production is less
than 70%, but will increase 15% if the activity is more than 80%.
 Rates would be reduced by 5% if the production is less than 70% but
increased by 10% if the activities of more than 80%.

You are required to provide a Flexible Budget at the level of activity of 60% and
90%.
Show clearly the cost per unit, total sales, total contribution margin, total mixed
cost, total fixed cost and total profit (loss).

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PRACTICE QUESTIONS

QUESTION 1

Distinguished between fixed and flexible budget.

QUESTION 2

The following information is the operational cost of Rooftop Sdn Bhd for the month
of April 2020:

Sales Based on Master
Variable cost 9 000 unit budget for
(Actual) 10 000 units
Direct material
Direct labour RM RM
Variable overhead 95 000 100 000
Selling expenses
Administrative expenses 18 350 20 000
Contribution Margin 26 500 30 000
Fixed Cost 9 800 10 000
Manufacturing 5 200 5 000
Selling 4 000 4 000
Administrative 31 150 31 000
Net Income
9 450 10 000
5 300 5 000
8 600 8 000
7 800 8 000

You are required to prepare:
i. Flexible budget for Rooftop Sdn Bhd at output level 9,000 units.

QUESTION 3
Prepare a budget for the overhead expenses of a production department for the
25 at activity level 80%, 90% and 100% using the following information:

 100% activity represents 60,000 direct labour hours.
 Direct labour rate per hour is expected at RM3.75
 Variable cost

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Indirect labour RM0.75 per direct labour hour
Supply RM0.375 per direct labour hour
Canteen expenses 6% of direct and indirect labour

 Semi variable costs are expected to relate in proportion with direct labour
hours for the next five years as follows:

YEAR DIRECT LABOUR HOURS SEMI VARIABLE COST (RM)

2021 64,000 20,800
2022 59,000 19,800
2023 53,000 18,600
2024 49,000 17,800
2025 40,000 (estimation) 16,000 (estimation)

 Fixed cost

Depreciation RM
Maintenance 18,000
Insurance 10,000
Rates 4,000
Management salary 15,000
25,000

QUESTION 4

Manager of Ballerina Sdn Bhd ask you to provide a Flexible Budget for the
company’s Production Department. Below is information on the company.

 Production department of the company is operating at 60% of normal activity
at the production level of 5,400 units of output.

 After taking into account certain factors, Sales Manager believes that the
expenditure budget for the next budget period is the 80% level of activity.

 Assumed there was mixed for manufacturing overhead costs and other
operating expenses.

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Below is information on the costs involved in the activity level of 50%, 60% and 70%.

ACTIVITY LEVEL 50% 60% 70%
RM RM RM
Direct material 56,700 68,040 79,380
Direct labour 24,300 29,160 34,020
Manufacturing overhead 56,400 60,720 65,040
Administrative expenses 47,250 47,250 47,250
Other operating expenses 110,700 114,480 118,260

You are required to provide a Flexible Budget activity level of 70% and 80%.

QUESTION 5
ThizNThat Enterprise has just realized the advantages of flexible budgeting in
planning, control and decision making purposes.
The following information is the budget cost information for the year 2020 at the
level production of 70% and 80%. The budgeted units of production at the level of
80% are 200,000 units.
The following information is the operational cost of ThiznThat for the year 2020:

BUDGET

PRODUCTION LEVEL 70% 80%

Material RM RM
Labour
Manufacturing Overhead 87,500 100,000
Electricity
Royalty 52,500 60,000
Commission 13,750 15,000
Supervision 6,500 7,000
Depreciation- machine 17,500 20,000
Clerical staff salaries 12,250 14,000
Rate 10,000 10,000

20,000 20,000

12,000 12,000
5,000 5,000

Note: The budgeted selling price per unit is RM2.70

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You are required to prepare a flexible budget at 60% and 85% activity level based
on the variable, fixed and semi-variable elements.

QUESTION 6

F&B is a company that produces canned drinks. Due to expansion program and
the uncertain global economic conditions, the management would like to
evaluate its performance at different activity levels.

Three different monthly activity levels were used to evaluate the performance as
shown below:

Direct Material 70% 80% 90%
Direct Wages RM RM RM
Production Overhead 44,100 50,400 56,700
Administration Overhead 18,900 21,600 24,300
Selling and Distribution Overhead 41,200 44,800 48,400
32,000 32,000 32,000
44,100 45,900 47,700

Currently the company is operating at a normal capacity of 80%, which represents
output of 7,200 units but the sales director believes that a realistic forecast for the
next budget period would be at a level of 60%.
Profit is 25% of the selling price. You are required to prepare a flexible budget for
F&B based on 60% level of activity showing clearly the contribution that could be
expected.

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REFERENCES

 Elly Suzana Kasim, D.D, R.A.R. (2019). Basic Cost Accounting.UiTM Press.
 Rosmaria Ismail (2017). Cost & Management Accounting 2. KPMMB.
 Aznurulailli Ahmad Sarkawi, M.Z.M.I. (2017). Final Practices DPA5023. PMS
 CIMA Official Terminology. Retrieved from https:/www.cimastudy.com.
 Drury,C., (2011). Cost and Management Accounting. South-Western

Cengage Learning.
 Prabir Das (2013). Cost Accounting: Fifth Edition. Oxford University Press.
 Proctor, R. (2012). Managerial Accounting. Pearson Education Limited.

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