Budgeting - Osborne Tutorial pg 171 task 5.5

jane Registered Posts: 165 Dedicated contributor 🦉
Hi peeps

Please could someone help me with this.

The bit I am stuck on is the working of the flexed budget for energy and equipment hire.
I have calculated the High and Low and have worked out that the fixed element of energy is £12800.00 - My problem is I don't know how the osborne books arrived at the answer of £161000?
I have been trying to figure this out now for the last half hour!! :(
I am experiencing similar problems with the equipment hire!
I find the osborne books are not very helpful with the answers by not actually showing their workings.
I would be so grateful if someone could put me on the right track.


  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034 mod

    I would need the details of the question to actually work it out.
    Without it, this is the technique:-

    [size=+1]step one[/size]
    Find the variable cost per unit produced
    Look at the two budget figures (they must both be budgets, never mix up the budget and actual values) and find
    1. the difference between the total cost energy (and again for equipment hire)
    2. the difference between the units produced
    3. Divide the difference in cost by the difference in units

    [size=+1]step two[/size]
    Find the total fixed cost
    Choose one of you budgets and identify the total cost of energy (and later equipment hire)
    deduct the variable cost for that budget (the variable cost per unit x units produced)
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034 mod
    Here is an example to practice on
    Attachment not found.
  • jane
    jane Registered Posts: 165 Dedicated contributor 🦉
    Hi Sandy, ok I have tried but still not getting it (sorry)
    Budget volume is 31500
    Energy is 151,000
    The budget for energy is semi-variable. The variable element is £4.00 per unit

    Actual volume is 34000
    Energy is 164000

    Have to flex the budget to a volume of 34000

    Equipment Hire

    Budget = 32000
    Actual = 35000

    The answers given are 161000 for energy and 36000 for equipment hire.

    The budget for equ hire is stepped, increasing at every 4000 units of monthly procedure.

    I bet you anything I will kick myself when I know!!
  • uknitty
    uknitty Registered Posts: 591 Epic contributor 🐘
    Hi Jane

    You don't need to use Hi-Lo for this.

    First the Energy. We are told that for a volume of 31,500 units the total energy is £151,000 and the variable cost is £4 per unit.

    The variable element is therefore 31,500 *£4 = £126,000

    The fixed element is £151,000 -£126, 000 = £25,000

    To flex the budget to 34,000 we have 34,000 * £4 = £136,000

    The fixed element remains the same at £25,000. So the total variable and fixed costs are £136,000 + £25,000 =£161,000.

    With respect to the stepped costs I do it this way (although I find it really hard to explain !) The budget is for 31,500 units. First I work out how many "lots" of 4000 that represents. 31500/4000 = 7.875. We have to round ***UP*** to 8 becase we cant have a part of 4000 units.

    The cost of 8 lots of 4000 units is £32,000. £32,000/8 =£ 4000. So every time we produce 4000 units we have costs of £4000.

    In the flexed budget we have 34,000 units. 34,000/4000 = 8.5. Again round up because we can't have a part batch of 4000. So now we have 9 lots of £4000 = £36,000

    Probably not explained the most eloquent way but I hope that helps !
  • jane
    jane Registered Posts: 165 Dedicated contributor 🦉
    Thank you so much uknitty

    I did have these figures as wel as other figures but didn't tie them up correctly!! I am getting myself so confused with alot of things, but I know that practice practice practice it will eventually sink in!! At least I hope so anyway.
    Thank you also SandyHood. I am so grateful that we students have support to each other through this forum.

  • yummy
    yummy Registered Posts: 6 Regular contributor ⭐
    Thank you uknitty!

    Just want to say thank you for all the answers for budgeting, i couldn't find any help from other resources. Your answer is simple and easy to understand.

    Here is a big thank you!!!!!!!!!!!!!!!!!!!!!!!
Privacy Policy