Preparation of flexible budgets based on an analysis of past cost behaviour and an adjustment for inflation TJ Limited is in an industry sector which is recovering from the recent recession. The directors of the company hope next year to be operating at 85% of capacity, although currently the company is operating at only 65% of capacity. 65% of capacity represents output of 10000 units of the single product which is produced and sold. One hundred direct workers are employed on production for 200 000 hours in the current year.

The flexed budgets for the current year are:

You are required:

(a) to prepare for next year a flexible budget statement on the assumption that the company operates at 85% of capacity; your statement should show both contribution and profit;

(b) to discuss briefly three problems which may arise from the change in capacity level;
(6 marks)

(c) to state who is likely to serve on a budget committee operated by TJ Limited and explain the purpose of such a committee.

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Capacity level 55% 65% 75% () () () Direct materials 846 200 1000 000 1153 800 Direct wages Production 1480 850 1750000 2019 150 overhead Selling and 596 170 650 000 650.000 703 830 distribution overhead 192310 200 000 207 690 Administration overhead 120 000 120 000 120 000 Total costs 3235 530 3 720 000 4204 470 Profit in any year is budgeted to be 16% of sales. The following percentage increases in costs are expected for next year