Management accounting

Kunda Limited manufactures one standard product. Currently it is operating on a normal activity level of 70% with an output of 6,300 units, although he sales director believes that a realistic forecast for the next budget period would be at a level of activity of 50%.

60% 70% 80%
Shs. Shs. Shs.
Direct materials 37,800 44,100 50,400
Direct wages 16,200 18,900 21,600
Production overheads 37,600 41,200 44,800
Administration overheads 31,500 31,500 31,500
Selling and distribution overheads 42,300 44,100 45,900
Total cost 165,400 179,800 194,200

Profit is 20% of selling price.


i. Prepare a flexible budget based on a 50% level of activity. (8 marks)

State two problems which may arise from such a change in the level of activity

(2 marks)

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