MC Question 24
The following scenario relates to questions 21–25.
Corfe Co is a business which manufactures computer laptop batteries and it has developed a new battery which has a longer usage time than batteries currently available in laptops. The selling price of the battery is forecast to be $45.
The maximum production capacity of Corfe Co is 262,500 units. The company’s management accountant is currently preparing an annual flexible budget and has collected the following information so far:
| Production (units) | 185,000 | 200,000 | 225,000 |
|---|---|---|---|
| $ | $ | $ | |
| Material costs | 740,000 | 800,000 | 900,000 |
| Labour costs | 1,017,500 | 1,100,000 | 1,237,500 |
| Fixed costs | 750,000 | 750,000 | 750,000 |
In addition to the above costs, the management accountant estimates that for each increment of 50,000 units produced, one supervisor will need to be employed. A supervisor’s annual salary is $35,000.
The production manager does not understand why the flexible budgets have been produced as he has always used a fixed budget previously.
24. Which of the following statements relating to the preparation of a flexible budget for the new battery are true?
(1) The budget could be time-consuming to produce as splitting out semi-variable costs may not be straightforward
(2) The range of output over which assumptions about how costs will behave could be difficult to determine
(3) The flexible budget will give managers more opportunity to include budgetary slack than a fixed budget
(4) The budget will encourage all activities and their value to the organisation to be reviewed and assessed
A 1 and 2 only
B 1, 2 and 3
C 1 and 4
D 2, 3 and 4