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    Flexible Budgeting: Using The High-Low Method To Analyse Costs and Flex The Budget

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    shan_waheed
    The document discusses flexible budgeting and the high-low method to analyze costs and flex budgets for different activity levels. It provides an example of budgets at two output levels and uses the high-low method to determine the behavior of each cost - whether it is fixed, variable, or mixed. Based on the cost changes between outputs, it isolates the fixed and variable components of the mixed labor cost. It then uses this analysis to restate the budget at a new output level of 20,000 units.

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    Flexible Budgeting: Using The High-Low Method To Analyse Costs and Flex The Budget

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    shan_waheed
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    The document discusses flexible budgeting and the high-low method to analyze costs and flex budgets for different activity levels. It provides an example of budgets at two output levels and uses the high-low method to determine the behavior of each cost - whether it is fixed, variable, or mixed. Based on the cost changes between outputs, it isolates the fixed and variable components of the mixed labor cost. It then uses this analysis to restate the budget at a new output level of 20,000 units.

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    The document discusses flexible budgeting and the high-low method to analyze costs and flex budgets for different activity levels. It provides an example of budgets at two output levels and uses the high-low method to determine the behavior of each cost - whether it is fixed, variable, or mixed. Based on the cost changes between outputs, it isolates the fixed and variable components of the mixed labor cost. It then uses this analysis to restate the budget at a new output level of 20,000 units.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    30 views4 pages

    Flexible Budgeting: Using The High-Low Method To Analyse Costs and Flex The Budget

    Uploaded by

    shan_waheed
    The document discusses flexible budgeting and the high-low method to analyze costs and flex budgets for different activity levels. It provides an example of budgets at two output levels and uses the high-low method to determine the behavior of each cost - whether it is fixed, variable, or mixed. Based on the cost changes between outputs, it isolates the fixed and variable components of the mixed labor cost. It then uses this analysis to restate the budget at a new output level of 20,000 units.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
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    of 4

    Andrew Harrington www.TeachMeNow.

    net

    Flexible Budgeting
    The most likely tasks in this area fall into the following groups:

    Using the high-low method to analyse costs and flex the budget Identification and investigation of variances

    Using the High-Low Method to Analyse Costs and Flex the Budget One of the purposes of budgeting is to exercise control the budgeted figures are compared with actual results, and significant variances investigated. For such comparison to be meaningful, it is essential to compare like with like. If the comparison reveals that twice as much material has been used as was budgeted, this may give cause for concern. However, if it is then revealed that output was three times as much as budgeted, usage no longer seems bad! Flexible budgeting allows for meaningful comparison. The original, fixed budget is adjusted and restated at different levels of activity. Knowledge of cost behaviour (the way that costs change as output changes) is essential. Costs may usually be classified as follows: Fixed Costs Variable Costs Mixed Costs Do not change as output changes Change in proportion to changes in output Contain a fixed and a variable element

    Sometimes the nature of individual costs will be stated explicitly in the question. Other questions will require candidates to investigate the nature of costs.

    Andrew Harrington www.TeachMeNow.net

    Example Budgets have been prepared for two levels of output, and are reproduced below: OUTPUT: 12,000 units 15,000 units

    Materials

    36,000

    45,000

    Labour

    58,000

    70,000

    Overheads

    40,000

    40,000

    TOTAL COST

    134,000

    155,000

    Restate the budget for an output of 20,000 units. Solution No separate information is given regarding costs, so the cost behaviour must be investigated. This is accomplished by considering the changes in costs between the two levels of output.

    Note first that the overhead cost does not change as output changes. This must be a fixed cost, and will therefore remain at 40,000 whatever the level of output.

    Consider the material cost next. This changes as output changes, so cannot be purely fixed. At each output, the cost per unit may be calculated as follows: At 12,000 units At 15,000 units 36,000 / 12,000 units 45,000 / 15,000 units = = 3.00 per unit 3.00 per unit

    Cost per unit does not change as output changes, so materials must be a purely variable cost.

    Andrew Harrington www.TeachMeNow.net

    The labour cost is different again. It changes, so cannot be purely fixed. However, examination of the cost per unit will show that this changes too, so the cost cannot be purely variable. It must be a mixed (or semi-fixed, or semi-variable) cost, the elements of which are analysed using the high-low method. Consider the change in output and the corresponding change in cost when output increases by 3,000 units, cost increases by 12,000. Realise that this increase must represent variable cost only. The fixed element, by definition, will not change as output changes. The 12,000 must be the variable cost of the 3,000 extra units, so variable cost per unit must be:

    12,000 / 3,000 units

    4.00 per unit

    The fixed cost is then identified by substituting this variable cost into either output level:

    Total cost of 15,000 units (per question) Variable cost Fixed cost 15,000 units x 4.00

    70,000 60,000 ----------10,000 -----------

    The behaviour of each cost has now been isolated, and the required budget may be prepared:

    OUTPUT: Materials Labour Overheads TOTAL COST (20,000 units x 3.00) {10,000 + (20,000 x 4.00)}

    20,000 units 60,000 90,000 40,000 ------------190,000 -------------

    This result may be checked by realising that the only change in cost should be the variable element: Materials Labour 3.00 per unit 4.00 per unit -------7.00 per unit --------

    Andrew Harrington www.TeachMeNow.net

    So, Total cost at 15,000 units Additional variable cost (5,000 units x 7.00) Total cost at 20,000 units 155,000

    35,000 ------------190,000 -------------

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