Question

The expenses budgeted for production of 1,000 units in a factory are furnished below:

Particulars Per Unit OMR.

Material Cost 700

Labour Cost 250

Variable overheads 200

Selling expenses (20% fixed) 130

Administrative expenses (OMR. 200,000) 200

Total Cost 1,480

Prepare a budget for production of 800 units assuming administrative expenses are rigid for all level of production.

a. OMR 1,239,300
b. OMR 1,229,200
c. OMR 1,350,000
d. OMR 1,250,000

Answer 1

The budget for the production of 800 units, given the fixed and variable costs for material, labor, variable overheads, selling expenses, and the fixed administrative expenses, is calculated at 1,229,200 OMR.

Step-by-step explanation:

The question requires preparing a budget for the production of 800 units based on the given per unit costs for 1,000 units, with the administrative expenses being fixed regardless of the production level. For variable costs like material, labor, and variable overheads, we simply multiply the per unit cost by the number of units to be produced (800).


However, fixed costs, which are the selling expenses' fixed component and administrative expenses, remain constant regardless of the production volume.

To calculate the total budget for 800 units, we follow these steps:

1. Material Cost: 700 OMR per unit x 800 units = 560,000 OMR
   
   
2. Labour Cost: 250 OMR per unit x 800 units = 200,000 OMR
   
   
3. Variable Overheads: 200 OMR per unit x 800 units = 160,000 OMR
   
   
4. Selling Expenses: Since 20% is fixed, we calculate the variable part as 80% of 130 OMR per unit for 800 units, which is 0.8 x 130 OMR x 800 units = 83,200 OMR. The fixed part is 20% of 130 OMR per unit for 1,000 units, which amounts to 0.2 x 130 OMR x 1,000 units = 26,000 OMR (this remains constant).
   
   
5. Administrative Expenses: These are fixed at 200,000 OMR and do not change with production volume.

Adding these up gives us the total cost for 800 units:

560,000 OMR (Material Cost) + 200,000 OMR (Labor Cost) + 160,000 OMR (Variable Overheads) + 83,200 OMR (Variable part of Selling Expenses) + 26,000 OMR (Fixed part of Selling Expenses) + 200,000 OMR (Administrative Expenses) = 1,229,200 OMR.