PJ Ltd is in an industry which is recovering from a recession. The directors of the company hope next year to be operating at 85% of capacity, although currently the company is operating only at 65% of capacity. 65% of capacity represents output of 10,000 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 as follows:
Capacity level55%65%75%
KKK
Direct materials846,2001,000,0001,153,800
Direct wages1,480,8501,750,0002,019,150
Production overhead596,170650,000703,830
Selling and distribution overhead192,310200,000207,690
Administration overhead120,000120,000120,000
Profit in any year is budgeted to be 162/3% of sales.
The following percentage increases in costs are expected for next year.
Increase %
Direct materials6.0
Direct wages3.0
Variable production overhead7.0
Variable selling and distribution overhead7.0
Fixed production overhead10.0
Fixed selling and distribution overhead7.5
Administration overhead10.0
Required:
(a) 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.(16Marks)
(b) List any three (3) problems that may arise from the change in capacity level.
(3 Marks)
(c) State any three (3) disadvantages of operating a participatory budgetary process.(6 Marks)