Boland Ltd manufactures a single component for the aviation industry. The following production costs and output levels have been recorded during July, August and September 2014: Output Levels 70% 85% 95% Units 21,000 25,500 28,500 Costs € Direct materials 315,000 382,500 427,500 Direct Labour 282,000 318,000 353,000 Production Overheads 106,800 126,960 140,400 Other overhead costs 71,800 86,200 95,800 Administration expenses 35,000 35,000 38,000 Profit is budgeted to be 20% of sales. Required: (i) Separate production overheads and other overheads into fixed and variable elements. (ii) Prepare a Flexible Budget for 90% Activity Level using Marginal Costing principles and show the contribution. (iii) Explain, with examples, ‘controllable’ and ‘uncontrollable’ costs.

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Boland Ltd manufactures a single component for the aviation industry - Leaving Cert Accounting - Question (b) - 2015

Question (b)

Boland Ltd manufactures a single component for the aviation industry. The following production costs and output levels have been recorded during July, August and Sep... show full transcript

Worked Solution & Example Answer:Boland Ltd manufactures a single component for the aviation industry - Leaving Cert Accounting - Question (b) - 2015

Step 1

Separate production overheads and other overheads into fixed and variable elements.

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Answer

To segregate production overheads into fixed and variable components:

Production Overheads Analysis:
- High Production Costs at 28,500 units: €140,400
- Low Production Costs at 21,000 units: €106,800
- The difference in units is 7,500 which correlates to a variable cost.
The variable cost for the production overheads can be calculated as follows: $ext{Variable Cost per Unit} = \frac{€140,400 - €106,800}{28,500 - 21,000} = \frac{€33,600}{7,500} = €4.48$

Thus, the fixed cost is: $€106,800 - (21,000 \times €4.48) = €12,720$
Other Overheads Analysis:
- High Other Overheads at 28,500 units: €95,800
- Low Other Overheads at 21,000 units: €71,800
- The difference in units is again 7,500.
The variable cost for the other overheads can be calculated similarly: $ext{Variable Cost per Unit} = \frac{€95,800 - €71,800}{28,500 - 21,000} = \frac{€24,000}{7,500} = €3.20$

Thus, the fixed cost is: $€71,800 - (21,000 \times €3.20) = €4,600$

Step 2

Prepare a Flexible Budget for 90% Activity Level using Marginal Costing principles and show the contribution.

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Answer

Flexible Budget Calculation for 90% Activity Level:
- Sales (at 90% of projected sales at 28,500 units):
  - Sales = 28,500 units * Sale Price per Unit (not specified in the data but can be assumed based on further calculations)
- Less Variable Costs:
  - Direct Materials: 27,000 units * €15.00
    - Total = €405,000
  - Direct Labour: 27,000 units * €11.00
    - Total = €297,000
  - Production Overheads: 27,000 units * €4.48
    - Total = €120,960
  - Other Overheads: 27,000 units * €3.20
    - Total = €86,400
- Total Variable Costs: €405,000 + €297,000 + €120,960 + €86,400 = €909,360
- Contribution Calculation:
  - Contribution = Sales - Total Variable Costs
  - Contribution = Sales - €909,360
- Fixed Costs:
  - Sum of fixed costs from overheads calculated previously.
  - Fixed production overheads = €12,720
  - Fixed other overheads = €4,600
- Total Fixed Costs = €12,720 + €4,600 = €17,320
- Profit Calculation:
  - Profit = Contribution - Total Fixed Costs
  - Given profit margin = 20% of Sales.

Step 3

Explain, with examples, ‘controllable’ and ‘uncontrollable’ costs.

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Answer

Controllable Costs: These are costs that can be managed or influenced by the manager of a cost center.

Example: If a department manager can decide on the amount of money spent for training programs, those training expenses are controllable.

Uncontrollable Costs: These are costs that a manager cannot affect in the short term.

Example: Rent for a facility is often considered an uncontrollable cost because it is usually fixed for a certain period and not influenced by how much the manager spends in other areas.

Boland Ltd manufactures a single component for the aviation industry - Leaving Cert Accounting - Question (b) - 2015

Worked Solution & Example Answer:Boland Ltd manufactures a single component for the aviation industry - Leaving Cert Accounting - Question (b) - 2015

Separate production overheads and other overheads into fixed and variable elements.

Prepare a Flexible Budget for 90% Activity Level using Marginal Costing principles and show the contribution.

Explain, with examples, ‘controllable’ and ‘uncontrollable’ costs.

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