Paper F2, Management Accounting Lecture by: Mr.

Farrukh Abbas

1-Page | 13
th
of June 2011 Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com
TYPES OF BUDGET

1. Fixed Budget:

This budget is prepared at the start of period at single activity level. It remains unchanged and at the period end
actual results are compared with budget.

2. Flexible Budget:

This budget is prepared at the start of the period at more than one activity levels. It remains unchanged and the
period and actual results are compared with the budget.

3. Flexed Budget:

This budget is prepared at the end of the period when fixed and flexible budget fail to provide a meaningful
comparison. This budget is prepared at actual activity level using the budgeted rates.

Rules for Preparing Flexed Budget:

Sales Revenue:

The amount of sales revenue to be included in flexed budget is calculated as below.

= /

Variable Cost:

The amount of variable cost to be included in flexed budget is calculated as below.

=

Fixed Cost:

As fixed is not affected by the change in activity level so the amount of fixed cost to be included in flexed budget
will be same as that in original budget.

Semi-Variable Cost:

Use High Low Method.

Example:

Budget Actual
Sales in Unit 1000 2000 1500
$ $ $
Revenue 20,000 40,000 28,500
Less: Cost
Direct Material (4,000) (8,000) (5,250)
Labor Cost (5,000) (9,000) (6,750)
Rent (3,000) (3,000) (3,500)

Profit 8,000 20,000 13,000
Paper F2, Management Accounting Lecture by: Mr. Farrukh Abbas

2-Page | 13
th
of June 2011 Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com
Prepare the flexed budget?

Solution:

Actual Flexed Variance
Sales in Unit 1500 1500
$ $ $
Revenue 28,500 30,000 1,500 Adverse
Less: Cost
Direct Material (5,250) (6,000) 750 Favorable
Labor Cost (6,750) (7,000) 250 Favorable
Rent (3,500) (3,000) 500 Adverse

Profit 13,000 14,000 1,000 Adverse

=




=
20,000
1000


= $20


= /
= 1500 20
= $,

=




=
4000
1000


= $4

As Direct Material is Variable Cost So,

=
= 1500 4
= $,

As Labor Cost is Semi-Variable Cost So we use High Low Method.

Variable Rate =
Total Cost at Highest Activity Level Total Cost at Lowest Activity Level
Highest Activity Level Lowest Activity Level


Variable Rate =
9000 5000
2000 1000


Variable Rate = $4


Paper F2, Management Accounting Lecture by: Mr. Farrukh Abbas

3-Page | 13
th
of June 2011 Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com
= +
9000 = +4 2000
= 9000 8000
= 1000

So, Labor Cost

= +
= 1000 +4 1500
=