Neco 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 Neco 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.