Complete Question and its Answer
Question: Using the following budgeted information for production of 5,000 and 12,000 units, prepare a flexible budget for 9,000 units.
5000 UNITS 12000 UNITS
EXPENSE A 17500 42000
EXPENSE B 19000 19000
EXPENSE C 21000 21000
Answer:
As here it is not given in the question that which expense is fixed and which one is variable. Now we will have to identify fixed costs and variable cost according to their cost behaviors.
We know that the costs that don't change in total with the change in activity level and remains fixed in total are fixed cost. If we see in the table above, we can easily identify fixed costs which don't change in total with the change in level of activity from 5000 units to 9000 units. These fixed cost include Expense B and C. The only cost left is Expense A and I am sure that its not fixed cost but I am not sure whether it is variable cost or not. Now I might check it by simply calculating cost per unit. If the cost per unit remains the same for different level of activities then it is variable cost.
Check:
For 5000 Units
Variable cost per unit= Expense for 5000 Units/5000 units
Variable cost per unit= $17500/ 5000 units= $3.5 per unit
For 12000 Units
Variable cost per unit= Expense for 12000 Units/12000 units
Variable cost per unit= $21,000/ 12000 units= $3.5 per unit
As the cost per unit is same for 5000 and 12000 level of activity, its variable cost.
Now we can Prepare Flexed Budget which is as under:
Flexed Budget 9000 Units
EXPENSE A (3.5*9000) 31500
EXPENSE B 19000
EXPENSE C 21000
The Expense B and C will remain in total same for this level of activity as well because these are fixed costs. Whereas the Expense A will change with the level of activity as it is variable cost in nature.