Fixed & Flexible Budget

The budget is called an estimation of cost, purchasing power, planning, and budget preparation on the first day. There are different types of Budgetary control such as fixed & flexible budgets, functional budgets, master budgets, and control ratio budgets.

 

Fixed & Flexible Budget

A fixed budget is prepared for 1 capacity, and a budget which is prepared for 2 or more capacities is a flexible budget. The budget is prepared mainly according to mainly 3 costs: Variable, Fixed, and Semi-Variable costs.

 

Variable Cost

Variable means changes. That is an increase in quantity and an increase in price. For example, if the cost of one ice cream is $5. Then the cost of five ice creams is $25. Because $5 per ice cream cost, that is $5*5 = $25. variable cost remains constant per unit.

Fixed Cost

Fixed cost is always fixed doesn't matter how much we produce quantity. fixed cost doesn't depend on quantity. such as if we pay rent of $1500 every year, the rent cost cannot be changed if we produce a 10000 quantity or if we produce a 20000 quantity we always pay $1500. fixed cost remains constant in total cost.

Example of Fixed Cost:

Number of units	100 unit	120 unit
Cost	$500	$500

The above example has a fixed cost because if we produce 100 units then the cost is $ 500, and if we have 120 units then the cost is $ 500. Have we produced an additional 20 units, the cost has not changed. Therefore, this is a fixed cost. 

Semi Variable Cost

Two types of cost include in semi-variable cost which is fixed cost and variable cost and there are mixed cost is called as semi-variable cost like electricity bill is fixed for some amount whether we use it or not.

Example:  

Number of units	100 unit	120 unit
Cost	$500	$540

In the above example, the cost for 100 units is $500, and for 120 units is $540 in that example the cost of 100 units and 200 units are not the same so that is why this is not a fixed cost. If a $500 cost is incurred for 100 units so per unit cost is $500/100 unit that is the per unit cost price is $5. The same as $540/120 unit is the per unit cost price of $4.5. Per unit cost price are not same for 100 unit and 120 unit. So hence it is not a variable cost. If fixed and variable do not come so then it is a semi-variable cost.

First, we will find out the variable cost if a variable cost is found, so automatically balance In the figure becomes a fixed cost.

Variable cost per unit	Change in cost	$540-$500	$40	$2
	Change in unit	120-100	20

If $2 is per unit cost if we produce 100 units then the cost will be $200 and for 120 units $240.

Classification of cost

Number of units	100 unit	120 unit
Variable	$200	$240
Fixed	$300	$300
Total cost	$500	$540

In the above example, the total cost is already given first we write down the value in total cost after word first we find out the variable cost and fixed cost are balanced in figure.

Examples of Identifying The Fixed Cost, Variable Cost, and Semi-Variable Cost.

Number of units	8000 unit	9000 unit
Direct Material	$16000	$18000
Direct Labour	$32000	$36000
Administration OH	$650	$650
Selling OH	$16000	$17500

Note: Fixed costs remain constant in the total cost

In the above example, Administration OH is fixed cost because if we produce 8000 units or either we produce 9000 units the cost is fixed which is $650, so hence it is a fixed cost.

Identifying the Variable cost

Note: Variable cost remain constant in Per Unit.

If 8000 Units we produce then the Direct Material cost is incurred $16000 that is per unit cost is $16000/8000 units = $2, same as if we produce 9000 units then the cost is incurred $ 18000 per unit cost $2. either we produce 8000 units or either we produce 9000 units, the per unit cost is same $2, so hence it is a variable cost.

Direct Labour is also variable because of the $4 per unit cost. either we produce 8000 units or 9000 units, per unit cost is the same, so it is a variable cost. 

Selling OH is not only a fixed cost because the cost is not the same for the 8000 units and 9000 units and also not only a variable cost because per unit costs are not the same, but it is a mixed cost that is a Semi-Variable Cost.

First, we calculate variable costs from semi-variable costs.

The formula for semi-variable cost

Variable cost per unit	Change in cost	$17500-$16000	$1500	$1.5
	Change in unit	9000-8000	1000

Change in total cost/Change in units

$1.5 Per unit Cost of variable

Total Variable Cost for 8000 units = 8000 Units * $1.5 = $12000

Total Variable Cost for 9000 units = 9000 Units * $1.5 = $13500

Fixed Cost Formula = Semi-Variable Cost- Total Variable Cost

Semi Variable Costs for 8000 units are $16000 and 9000 units $17500

Number of units	8000 units	9000 units
Variable Cost	$12000	$13500
Fixed Cost	$4000	$4000
Total cost	$16000	$17500

Question: Fixed cost increase by 10%

Number of units	150 unit	200 unit
Cost	$700	$700

Answer: If there is an upward or downward trend in fixed cost, it affects only the Total Cost and does not affect quantity so, the answer will be $700+10%= $770.

Question: Variable cost increase by 10%

Number of units	150 unit	200 unit
Cost	$750	$1000

Answer: If there is an upward or downward trend in Variable cost, it affects only the Quantity and does not affect total cost so, 

The answer will be Per unit cost is $5. that is $750/150 units. ($5+10%) = $5.5

For 150 Units = 150 units * $5.5 = $825.

For 200 Units = 200 units *$5.5 = $1100.

Question: Semi Variable Cost Increase by 50%

Number of units	150 unit	200 unit
Cost	$750	$800

Answer: First We Identify Variable Costs after that Fixed Costs.

Variable cost per unit	Change in cost	$800-$750	$50	$1
	Change in unit	200-150	50

Change in total cost/Change in units

$1 Per unit Cost of variable

$1+50% = $1.5

Total Variable Cost for 150 units = 150 Units * $1.5 = $225

Total Variable Cost for 9000 units = 200 Units * $1.5 = $300

Identify Fixed cost from semi-variable cost.

Fixed Cost = Total semi-variable cost - Total Variable Cost

Fixed Cost for 150 units = $ 750 - (150 units *$1)

Fixed Cost for 150 units = $ 600

Fixed Cost for 200 units = $ 800 - (200 units *$1)

Fixed Cost for 200 units = $ 600

Fixed Cost increase by 50% = $600+50% = $900

Question: ABC Factory normally operates 5000 hours which is at 50% capacity. Prepare Flexible Budget and Find out 70% capacity and 90% capacity if these costs occur.

Fixed Cost	$18000
Variable Cost	$20000

Answer: If the factory normally operates at 50% capacity for 5000 hours, so, 70% capacity for 7000 hours, and 90% capacity for 9000 hours. 

Find out 70% capacity, and how many hours.

50% ---> 5000 hours

70% --->?

70 * 5000 hours / 50 = 7000 hours

Find out 90% capacity, and how many hours.

50% ---> 5000 hours

90% --->?

90 * 5000 hours / 50 = 9000 hours

If Fixed Cost Occurs $18000 for 5000 hours, how much cost for 7000 hours

5000 hours ---> $18000

7000 hours --->?

7000 hours * $18000 / 5000 hours = $25200.

If Fixed Cost Occurs $18000 for 5000 hours, how much cost for 7000 hours

5000 hours ---> $18000

9000 hours --->?

9000 hours * $18000 / 5000 hours = $32400.

If Variable Cost Occurs $20000 for 5000 hours, how much cost for 7000 hours

5000 hours ---> $20000

7000 hours --->?

7000 hours * $20000 / 5000 hours = $28000.

If the Variable Cost Occurs $18000 for 5000 hours, how much cost for 9000 hours

5000 hours ---> $20000

9000 hours --->?

9000 hours * $20000 / 5000 hours = $36000.

Final Answer:

Hours	5000	7000	9000
Capacity	50%	70%	90%
Fixed	$18000	$25200	$32400
Variable	$20000	$28000	$36000