The document provides information about a factory's variable, semi-variable, and fixed expenses at different activity levels to construct a flexible budget. It also includes information about an indirect manufacturing cost budget and actual expenses for a machine shop to determine if the foreman is entitled to a bonus. Finally, it outlines the expansion plans and costs for a manufacturing company and asks which alternative for operations after expansion would be optimal.

1. Budgetary Control – Assignment VII<br />Q.1 A factory, which expects to operate 7,000 hours, i.e., at 70% level of activity, furnishes details of expenses as under:<br />Variable expensesRs. 1,260Semi-variable expensesRs. 1,200Fixed expensesRs. 1,800<br />The semi-variable expenses go up by 10% between 85% and 95% activity and by 20% above 95% activity. Construct a flexible budget for 80, 90 and 100 per cent activities.<br />Solution:<br />% Activity70%80%90%100%Variable expenses1,2601,4401,6201,800Semi-Variable expenses1,2001,2001,3201,584Fixed Expenses1,8001,8001,8001,800Total Expenses4,2604,4404,7405,184<br />Q.2 Action Plan Manufactures normally produce 8,000 units of their product in a month, in their Machine Shop. For the month of January, they had planned for a production of 10,000 units. Owing to a sudden cancellation of a contract in the middle of January, they could only produce 6,000 units in January.<br />Indirect manufacturing costs are carefully planned and monitored in the Machine Shop and the Foreman of the shop is paid a 10% of the savings as bonus when in any month the indirect manufacturing cost incurred is less than the budgeted provision.<br />The Foreman has put in a claim that he should be paid a bonus of Rs. 88.50 for the month of January. The Works Manager wonders how any one can claim a bonus when the Company has lost a sizeable contract. The relevant figures are as under:<br />Indirect manufacturing costExpenses for a normal monthPlanned expenses for JanuaryActual expenses for JanuaryRs.Rs.Rs.Salary of foreman1,0001,0001,000Indirect labour720900600Indirect material8001,000700Repairs and maintenance600650600Power 800875740Tools consumed320400300Rates and taxes150150150Depreciation800800800Insurance1001001005,2905,8754,990<br />Do you agree with the Works Manager? Is the Foreman entitled to any bonus for the performance in January? Substantiate your answer with facts and figures.<br />Q.3 X Ltd., a manufacturing company, having a capacity of 7 lakh units has prepared the following cost sheet:<br />(Per unit) Rs.Direct Material 30Direct Wages 12Factory Overheads 30 (50% variable)Selling and Administration Overheads 18 (Two-third Fixed)Selling price 120<br />During the year 2006-07, the sales volume achieved by the company was 6 lakh units. The company has launched an expansion programme, the details of which are as under:<br />(i) The capacity will be increased to 12 lakh units.<br />(ii) The additional fixed overheads will amount to Rs. 50 lakhs upto 10 lakh units and will increase by Rs. 25 lakh more beyond 10 lakh units.<br />(iii) The cost of investment of expansion is Rs. 100 lakh, which is proposed to be financed through bank borrowings carrying interest at 15% per annum.<br />(iv) The average depreciation rate on the new investment is 15% based on straight line method.<br />After the expansion is put through, the company has two alternatives for operations:<br />(i) Sales can be increased up to 10 lakh units by spending Rs. 10,00,000 on special advertisement campaign to explore new market. <br />Or<br />(ii) Sales can be increased to 12 lakh units subject to the following: <br />By an overall reduction of Rs. 10 per unit in selling price on all the units sold.<br />By increasing the variable selling and administration expenses by 8%.<br />The direct material costs would go down by 1.5% due to discount on bulk purchasing. <br />Requirements:<br />I. Construct a Flexible Budget at the level of 6 lakhs, 10 lakhs and 12 lakhs unit of production.<br />II. Calculate Break Even Point before and after expansion.<br />III. Advise the optimum level of output for expansion. <br />