Stepped cost- Budgeting CBA

stuartander

Hi,
Im going through my revision kit from kaplan, and i dont understand this bit of the question:

This is a flexed budget queston..

Equipment hire is a stepped cost, increasing @ every 15000 units of production.

budgeted production= 76,000 units Actual production = 72,000

The question is asking you to flex the budget to the actual production, the 1 i dontunderstand is this equipment costs.

Budgetted cost = 48000 and the actual cost = 42000, I need to know what the flexed budget is for 72000 units..

Any ideas??

My thinking was they you need to know the cost as to wat it would step up too, surely!!

rehana

it must cost x pounds per 15000 units.
So it is 76000/15000 = 5.06 , so it will have to be x 6 (so it will be to next 15000)
48000/6 = 8000 pounds per 15000 units.

flex to 72000 units 72000/15000 = 4.8 so will have to be 5
Therefore cost is 5 x 8000 = 40000

pirate

If it just changed at 75000 units to a new cost (which is divisible by 15000) then I would say that that flexed cost is going to be what it would be at 60,000 units. Does it say what the cost are by for every 15000 units and what the starting point is for the stepped cost

stuartander

Hi Rehana,

Ur spot on,thnks..

Hi Pirate, No it doesnt give that info, which was why i was confused, didnt know you had to round etc..

Thanks Again

rehana

no prob, budgeting is still fresh in the brain as sat it last week

anniebabe

This is one of the bits that I am stuck on at the moment, and cant find it in the Osborne book, I know we did a little bit on stepped costs at level 3, but i defo didnt do this.
Still stuck on it now.
Does anyone have anything they can pdf me on it?
ta.

Rinske

Hi Annie,

What bit are you stuck on?

The stepped costs are basically costs that don't increase with each product produced, but at certain levels.

If you think of a real life situation, something like this could be happening if you have a factory and you got a machine to produce 1000 products per month. Once you want to produce more than 1000 products per month, you will need to buy a second machine.

So say your machine costs 500 per month to rent.

If you plan to produce 1 product per month, the cost would be 500 per month as you need 1 machine to produce them.
If you plan to produce 1000 products per month, the cost would also be 500 per month, as you can just use one machine as well.

If you plan to produce 1001 products per month, the costs would be 1000 per month, as you need 2 machines to produce them.
But if you plan to produce 2000 products per month, the cost would still be 1000 per month.

The idea is that it shows steps in production, rather than a cost per item. So in order to calculate your cost for a flexed budget, you would need to check how many items you can fit in a step. In the above example that is 1000.

In order to calculate the cost you use the number of units in your flexed budget as your basis. Say this is 5500.

You divide this by the number of units in your stepped costs. So that would be 5500 divided by 1000. The result is 5.5.
Now you can't rent or buy 5.5 machines, so you need 6 machines to make the required units.
One machine costs 500, so 6 times 500 is 3000 in total.

Does that help?

anniebabe

Hi Rinske
Thanks for trying to explain it to me, I am going to have to sit down and work through it in the mornng.
I generally understood what a stepped cost was, it was just the workings.
Hadnt looked at it until I started working through the past papers, and got got confused with it.
Hoping the penny drops very soon, as its the only thing I am struggling with on the second section of the PCR exams, the first section is another story! lol

anniebabe

Hi guys,
ok i am working through PCR past paper June 2006 - section 2.
I have calculated the budgeted maintenance cost per 10000 units
which was 275000/50000 = £5.50/unit x 10000 units £55000
so I understood that bit.
but now I have do the flexed budget Task 2.1
the units have changed to 72000
I am now confused as to how to work this bit out - in the answers it says £440000
can anyone explain?
Many thanks

Woooof

anniebabe wrote: »

Hi guys,
ok i am working through PCR past paper June 2006 - section 2.
I have calculated the budgeted maintenance cost per 10000 units
which was 275000/50000 = £5.50/unit x 10000 units £55000
so I understood that bit.
but now I have do the flexed budget Task 2.1
the units have changed to 72000
I am now confused as to how to work this bit out - in the answers it says £440000
can anyone explain?
Many thanks

8 steps to cover the 72000 units. So 8 x £55000 = £440000

anniebabe

thanks woof,
just cant see the wood for the trees at the moment.
i had managed to get the 8 steps out, but couldnt suss out the £