Hi I am a newbie to this site

Jayney

Could someone shed some light on a question on budgeting, level 4. Stepped cost
Original budget 121,000 units - cost £91,000 for equipment hire
Actual budget 105,000 units, cost £86,350 for equipment hire

I need to flex the budget & stepped cost increases at every 20,000 units of production How do I arrive at flexed cost?

Thank you in advance

Jade Hunt

Hi Jayney,

Going from what you have said, I think it is as follows…

91000 / 7 (you are in the 7th lot of 20000 in the original budget) = 13000 per 20k units
13000 x 6 (6th lot of 20000 in actual) = 78000
So an adverse variance of 8350?

Maybe check the answer, if you know the page/book you are using that could be helpful

Jayney

Thank you that is the right answer. Can you explain how you got to 7 lots? Sorry find this area hard to get my head round.

Nps

Cost of one 'lot' of equipment hire will allow you to produce 20,000 units, 2 'lots' will allow you to produce 40,000, 3 'lots' produce up to 60,000 and so on. 6 lots will allow production of up to 120,000 so you need 7 to produce 121,000. In other words 121,000/20,000 = 6.05 (hence 6 lots are not enough so you need to step up to 7 lots).

Jayney

Thank you for your help Nps