Classics, SA APrepare an Overhead Budget for the Expected Activity Level for Company

question 25

Essay

Classics, SA., uses a flexible budget for overhead costs. The company expects to produce 20,000 units of the product it manufactures. Half of the units require 0.50 direct labour hours per unit. The remainder requires 0.75 direct labour hours per unit. The cost formulas for each of the four overhead items is as follows: $\begin{array}{lll}&\text { Fixed Cost } & \text { Variable Cost } \\\text { Power } & £ 1,000 & £ 0.25 \\\text { Maintenance } & £ 5,000 & £ 0.40 \\\text { Indirect labour } & £ 8,000 & £ 2.00 \\\text { Rent } & £ 12,000 &\end{array}$
a.Prepare an overhead budget for the expected activity level for the coming year.
b.Prepare an overhead budget that reflects production that is 10 per cent higher than expected.

Calculate and interpret the Net Present Value (NPV) and Internal Rate of Return (IRR) for investment projects under uncertainty.

Explain the role of probability in evaluating project cash flows and outcomes.

Understand the certainty equivalent approach and its application in adjusting cash flows for risk.

Identify the appropriate discount rate for different projects based on their risk profiles.

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Definitions:

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