QUESTION 5 (20 Marks) Using the information provided below, answer the following questions. INFORMATION Thohoyandou Limited operates a system of flexible budgets and the flexed budgets for expenditure for the first two quarters of 20X4 were as follows: Flexed budgets quarters 1 and 2 Quarter 1 Quarter 2 Activity Sales units 18 000 28 000 Production units 20 000 26 000 Budget cost allowances R R Direct materials 2 600 000 3 380 000 Production labour 1 480 000 1 630 000 Production overhead 1 760 000 2 180 000 Administration overhead 520 000 520 000 Selling and distribution overhead 594 000 724 000 Total budget cost allowance 6 954 000 8 434 000 Despite a projected increase in activity levels, the cost structures in quarters 1 and 2 are expected to continue during quarter 3 of 20X4 as follows: (a) The variable cost elements behave in a linear fashion in direct proportion to volume. However, for production output in excess of 28 000 units the unit variable cost for production labour increases by 50 per cent. This is due to a requirement for overtime working and the extra amount is payable only on the production above 28 000 units. (b) The fixed cost elements are not affected by changes in activity levels. (c) The variable elements of production costs are directly related to production volume. (d) The variable element of selling and distribution overhead is directly related to sales volume. Required: 5.1. Using the high low method, determine the cost behaviours (i.e., the variable costs per unit and fixed costs) of each of the five cost items shown in the flexed budgets for quarters 1 and 2 of 20X4. (10 marks) 5.2. Based on the cost behaviours determined in 5.1, prepare a statement of the budget cost allowances for quarter 3 of 20X4, based on sales volume of 29 000 units and production volume of 30 000 units.