Lecture on Operating Costs and Budgeting

Highlights

• Highest Production:
  • Month: May
  • Units: 29000
  • Cost: 66000
• Lowest Production:
  • Month: January
  • Units: 15000
  • Cost: 45000

Determining Variable Costs

• Analysis of Change:
  • Change in Units: 14000 (29000 - 15000)
  • Change in Cost: 21000 (66000 - 45000)
• Calculation of Variable Cost:
  • Formula: Change in Cost ÷ Change in Units
  • 21000 ÷ 14000 = 1.5 per Unit
• Variable Cost Conclusion: 1.5 per Unit

Difference Between Variable and Fixed Costs

• Variable Cost: Increases or decreases with production
• Fixed Cost: Remains constant despite changes in production
• How to Determine:
  • Units x Variable Cost (e.g., 15000 x 1.5 = 22500)
  • Total Cost - Variable Cost = Fixed Cost

Importance of Flexible Budget

• Flexible Budget: To assess costs at different production levels
  • Using the high and low point method
• Benefit: Accurate comparison; budget determination according to production levels
• How to Create:
  • Identify the high production level and the low production level
  • Calculate the change in costs
  • Determine the variable cost rate
  • Analyze the cost of each month

Examples and Applications

• What to Do:
  • Zero production = Only fixed cost applicable
  • One unit production = (22500 fixed + variable cost)
  • Various month examples: 15000 x 1.5, 18000 x 1.5, etc.
• Month Impact: Effect on cost assessment

Conclusion and Q&A

• Fixed Cost: Will remain constant whether production is zero or high
• Various Methods: Other budgeting methods such as scatter diagram, least squares method, etc.
• Work Questions and Homework: Past papers, Regent papers, revision questions, work on case budget

Other Important Points:

• Essential info and complexities for a flexible budget
• Errors and correction measures in fixed and variable costs

Conclusion

• Different aspects of budgeting
• Principles of fixed and variable costs
• Why flexible budgeting is important
• Study of other methods to move forward