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Conlon Ltd manufactures a component for the computer industry - Leaving Cert Accounting - Question 9 - 2018
Question 9
Conlon Ltd manufactures a component for the computer industry. The following flexible budgets have already been prepared for 60%, 75% and 90% of the plant's capacity... show full transcript
Worked Solution & Example Answer:Conlon Ltd manufactures a component for the computer industry - Leaving Cert Accounting - Question 9 - 2018
Step 1
Separate production overheads into fixed and variable elements.
Answer
For the production overheads:
- High Cost (at 90% capacity): €184,600
- Low Cost (at 60% capacity): €132,400
- Difference: €52,200
The variable cost per unit is calculated:
ext{Variable Cost per Unit} = rac{ ext{Difference}}{ ext{Difference in Units}} = rac{€52,200}{12,000 ext{ units}} = €4.35
Thus, the total variable costs are:
- Variable Costs at 90% capacity: €184,600 - Fixed Costs
Fixed Costs Calculation:
- Total production overhead cost: €184,600
- Less variable costs: €163,200
Therefore, Fixed Costs = €21,400.
Step 2
Separate other overhead costs into fixed and variable elements.
Answer
For the other overhead costs:
- High Cost (at 90% capacity): €250,800
- Low Cost (at 60% capacity): €169,200
- Difference: €81,600
The variable cost per unit is:
ext{Variable Cost per Unit} = rac{€81,600}{12,000 ext{ units}} = €6.80
Thus, the total variable costs are:
- Variable costs at 90% capacity: €244,800
Fixed Costs Calculation:
- Total other overhead cost: €250,800
- Less variable costs: €244,800
Therefore, Fixed Costs = €6,000.
Step 3
Prepare a flexible budget for 95% activity level using marginal costing principles, and show the contribution.
Answer
For a flexible budget at 95% capacity (c. 34,200 units):
Calculation:
-
Sales = 34,200 units x Selling Price per unit (assuming 20% profit margin)
-
Costs:
- Direct materials: €171,000
- Direct labour: €171,000
- Production overheads: €165,300
- Other overhead costs: €258,240
Contribution Calculation:
- Total Costs = Direct Materials + Direct Labour + Production Overheads + Other Overheads
- Contribution = Sales - Total Costs
Step 4
Prepare flexible budgets, using marginal costing principles and showing contributions, for both options taking the new cost structures into account.
Answer
Option 1:
Sales (updated for capacity): 40,000 units
- Total Sales = 40,000 * Sales Price
Costs:
- Adjusted Direct materials = €180,000
- Adjusted Direct labour = €208,000
- Adjusted Production overheads = €150,000
- Adjusted Other overhead costs = €272,000
Total Costs and Profit:
- Calculate the contribution and profit accordingly.
Option 2:
Sales (new capacity 44,000):
- Total Sales = 44,000 * Sales Price
Costs:
- Direct materials = €198,000
- Direct labour = €228,000
- Production overheads = €191,000
- Other overhead costs = €299,200
Total Costs and Profit:
- Calculate the contribution and profit accordingly.
Step 5
Step 6
Distinguish between the terms ‘contribution’ and ‘profit’.
Answer
Contribution refers to the amount that sales contribute towards covering fixed costs and generating profit. It is calculated as:
Profit, on the other hand, is the leftover revenue after all costs (both fixed and variable) have been deducted from sales:
Step 7
Outline why Conlon Ltd would prepare a flexible budget.
Answer
Conlon Ltd would prepare a flexible budget to:
- Manage Costs: By adjusting the budget for different activity levels, they can monitor actual performance against expected outcomes.
- Adapt to Activity Levels: This allows the company to compare costs and performance at varying levels of production efficiently.
- Facilitate Decision-Making: Flexible budgets provide insights for better operational decision-making during fluctuating business conditions.