BACHELOR OF BUSINESS ADMINISTRATION (FINANCE & ACCOUNTANCY)

DEPARTMENT OF PROFESSIONAL STUDIES

CHRIST (DEEMED TO BE UNIVERSITY), BENGALURU
SEMESTER IV
BBF435: PERFORMANCE MANAGEMENT
(EFFECTIVE FOR THE ADMITTED BATCH 2022-2023)
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NUMERICAL PROBLEMS IN BUDGETING
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Incremental Budgeting

1. AW Inc produces two products, A and C. In the last year (20X4) it produced 640 units
of A and 350 units of C incurring costs of $672,000. Analysis of the costs has shown
that 75% of the total costs are variable. 60% of these variable costs vary in line with
the number of A produced and the remainder with the number of C.
The budget for the year 20X5 is now being prepared using an incremental budgeting
approach. The following additional information is available for 20X5:
• All costs will be 4% higher than the average paid in 20X4.
• Efficiency levels will remain unchanged.
• Expected output of A is 750 units and of C is 340 units.
What is the budgeted total variable cost of products A and C for the full year 20X5?
Solution

2. CP produces two products X and Y. In the year ending 30 April 20X1, it produced
4,520 units of X and 11,750 units of Y and incurred costs of $ 1,217,200.
The costs incurred are such that 60% are variable. 70% of these variable costs vary
with the number of units of X produced, with the remainder varying with the output of
Y.
The budget for the three months to 31 st October 20X1 is being prepared using an
incremental approach based on the following:
(1 of 5)
  All costs will be 5% higher than the average paid in the year ended 30 April 20X1.
 Efficiency levels will be unchanged.
 Expected output
 X =1,210 units
 Y = 3,950 units
Required:
What is the budgeted cost for the output of X (to the nearest $100) for the three
months ending 31 October 20X1?
Solution

Costs break up in the year ended 30th April 20X1

Total cost = $1,217,200

Variable costs (60%) = $ 730,320

Fixed costs (40%) = $ 486,880

Variable costs of X (70% of total variable costs) = $ 511,224

511,224
= = $ 113.10
4520

Variable cost per unit of Y (30% of total variable costs) = $ 219,096

219096
Variable cost per unit of Y = = $ 18.65
11750

Costs break up in the year ended 31st October 20X1 (based on incremental budgeting)

All cost increase by 5% from the previous year

Variable cost per unit of x = 113.10 × (1.05) = $118.775

Variable cost per unit of Y = 18.65 × (1.05) = $ 19.5825

Fixed costs = 486,880 × (1.05) = $ 511,224

Expected output:

X= 1,210 units

Y = 3,950 units

Total budgeted cost of X & Y (without fixed costs)

X = 118.775 × 1,210 = $ 143,717.75

Y = 19.5825 × 3,950 = $ 77,350.875

(2 of 5)
Total = $ 221,068.625

Rolling Budget
3. A company uses rolling budgeting and has a sales budget as follows:
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
$ $ $ $ $
Sales 125,750 132,038 138,640 145,572 542,000

Actual sales for Quarter 1 were $123,450. The adverse variance is fully explained by
competition being more intense than expected and growth being lower than
anticipated. The budget committee has proposed that the revised assumption for
sales growth should be 3% per quarter.
Update the budget as appropriate.

4. Quesnch Co is a rapidly growing, non-alcoholic drinks company which currently uses

a system of incremental budgeting. Quench Co has been receiving complaints from
customers about late deliveries and poor-quality control. Quench Co’s managers
have explained that they are working hard within the budget and capital constraints
imposed by the board and have expressed a desire to be less controlled.
Quench Co’s incremental budget for the current year is given below. You can assume
that cost of sales and distribution costs are variable and administrative costs are
fixed.

Q1 Q2 Q3 Q4 Total
$’000 $’000 $’000 $’000 $’000
Revenue 8,760 8,97 9,204 9,434 36,377
9
Cost of sales 4,818 4,93 5,062 5,189 20,008
9
Gross profit 3,942 4,04 4,142 4,245 16,369
0
Distribution costs 789 808 829 849 3,275
Administrative costs 2,107 2.10 2,107 2,107 8,428
7
Operating profit 1,046 1,12 1,206 1.289 4,666
5

The actual figures for Quarter 1 (which has just completed) are:

$’000
Revenue 8,966
Cost of sales 4,932
Gross Profit 4,034
Distribution costs 807
Administration costs 2,107
Operating profit 1,120

(3 of 5)
 On the basis of the Q1 results, sales volume growth of 3% per quarter is now
expected.

Required
Recalculate the budget for Quench Co using rolling budgeting.

Activity Based Budgeting

5. Tiddleypeeps is a private childcare provider and operates from two different sites. Site
1 currently employs 15 staff and has 120 children registered for childcare provision.
Site 2 employs 24 staff and has 160 children registered. The total overhead for
salaries at Tiddleypeeps this year was $624,000.

Tiddleypeeps is looking to expand both of its premises next year such that it can
provide childcare for an additional 15 more children at site 1 and 24 additional
children at site 2.

Management use staff numbers to allocate costs between the sites and believe that
the number of registered children is the most appropriate cost driver for salaried
costs.

Required:

Using an activity-based budgeting approach, calculate the budgeted cost for salaries
for both sites at Tiddleypeeps for next year.

Flexible budgeting
6. Aoife Co manufactures smartphones and has developed a new handset, the ‘H’ The
maximum production capacity of Aoife Co is 150,000 units of the new handset. The
company’s management accountant is currently preparing an annual flexible budget
and has collected the following information so far for the ‘H’.
Production Units of ‘H’ 100,000 120,000 150,000
units units units
Material costs ($) 700,000 840,000 1,050,000
Labour costs ($) 750,000 900,000 1,125,000
Incremental Fixed costs ($) 60,000 60,000 60,000

(4 of 5)
In addition to the above costs, the management accountant estimates that for each
increment of 15,000 units produced, one supervisor will need to be employed. A
supervisor’s annual salary is $42,000.
(a) Assuming the budgeted figures are correct, what would the flexed total
production cost be if production is 90% of maximum capacity?
(b) The management accountant has said that the factory’s smartphone quality
control system carries a cost that was not included in the flexible budget but
should be. He estimates that every 1,000 smartphones will take 5 hours to
control; every quality control hour has a variable cost of $120 and fixed quality
control costs amount to $250,000. What is the estimated quality cost if
production of the smartphones is 90% of maximum capacity?

(5 of 5)