Reference no: EM13878782

Drum Ltd. makes a single product, using a process involving stamping a circle out from sheet steel, covering it with hide and attaching it to a sidepiece.

For 2004 the standard materials costs and requirements have been as follows: 0.4 square metres of sheet steel at £5.20 per square metre; 0.8 square metres of hide at £9.20 per square metre; sidepiece at £4.20. Price increases relating to these raw materials have been notified for the year 2005. Sheet steel will fall in price by 10%, whilst hide will increase in price by 10% and the sidepiece will cost £5.

It takes 30 minutes of labour to punch out the metal, cut the hide and complete the assembly of the product. Labour currently costs the company £4 per hour, and this will increase by 4% with effect from 1 January 2005.

Semi-variable overheads measured at different levels of output in 2004 were:

Output	Costs (£)
30,500	20,225
45,560	27,002
63,620	35,129
81,040	42,968

For the year ended 31 December 2004 fixed factory costs were as follows:

Management      £35,600

Depreciation      12,500

Insurance          5,600

Rates                11,000

With the exception of depreciation, all fixed and semi-variable overheads will increase by 5% with effect from 1 January 2005.

(a) Prepare flexible budgets for monthly output levels of 55,000 and 65,000 units for the year ended 31 December 2005.

(b) Explain the principal benefits that firms obtain from the preparation of flexible budgets.