Question $5$

Kostco Ltd produces and sells a single product named "Frames". The original budget for the company was to produce and sell $80,000$ units of Frames in the year ended $30$th April $2023.$

Kostco Ltd$.$ faced a good competition in the market during the later part of the year. As a result, the total units of Frames produced and sold were $72,000$ units only.

Year Ended $30$th April $2023$

Original Budget Actual Results Variance

Volume $($units$)80,00072,0008,000$ Adv

$$

Sales $1,600,0001,464,000136,000$ Adv

Costs:

Materials $320,000284,00036,000$ Fav

Labour $640,000592,00048,000$ Fav

Production Overheads $340,000334,0006,000$ Fav

Equipment Hire $28,00026,000$ NIL

Depreciation $40,00044,0004,000$ Adv

Rates & Insurance $60,00064,0004,000$ Adv

Profit $172,000120,00052,000$ Adv

Additional information:

$$ Material and labour are variable costs.

$$ Production Overheads are a semi$-$variable cost. The budgeted cost for production overheads at $70,000$ units is $300,000.$

$$ Equipment hire is a stepped fixed cost. The equipment has a capacity of producing $6,000$ units for the year.

$$ Remaining costs are fixed.

Required:

a$)$ Using the information provided prepare a flexible budget statement for $72,000$ units for the year ended $30$th April $2023$ and compare it with the actual results, showing all variances.

$(18$ marks$)$

b$)$ Explain THREE reasons why flexible budgets are more effective than fixed budgets for the purpose of budgetary control.

$(12$ marks$)$

$($Maximum words: $600)$