Simple Example (Numbers Made Easy)

Original budget at 5,000 units:

• Selling price per unit: RM10
• Direct material: RM10,000
• Direct labour: RM7,500
• Fixed overheads: RM8,000

Step 1: Calculate per unit for variable costs

• Sales per unit = RM10
• Direct material per unit = 10,000 ÷ 5,000 = RM2
• Direct labour per unit = 7,500 ÷ 5,000 = RM1.50

Fixed overhead remains RM8,000

Required: Flexible budget at 7,000 units

Sales:

= 7,000 × RM10 = RM70,000

Variable costs:

• Direct material = 7,000 × RM2.00 = RM14,000
• Direct labour = 7,000 × RM1.50 = RM10,500

Fixed costs:

Fixed overheads = RM8,000 (no change)

Flexible Budget at 7,000 units

	RM
Sales	70,000
Less: Costs
Direct material	14,000
Direct labour	10,500
Fixed overheads	8,000
Total cost	32,500
Profit	37,500

Students can see:

• At higher units, sales and variable costs increase,
• But fixed cost stays the same, so profit increases.