Flexible Overhead Budgets for Control Johnny Lee Inc. produces a line of small gasolinepowered engines that can be used in a variety of residential machines, ranging from different typesof lawnmowers, to snowblowers, to garden tools (such as tillers and weed-whackers). The basicproduct line consists of three different models, each meant to fill the needs of a different market.Assume you are the cost accountant for this company and that you have been asked by the ownerof the company to construct a flexible budget for factory overhead costs, which seem to be growingfaster than revenues. Currently, the company uses machine hours (MHs) as the basis for assigningboth variable and fixed factory overhead costs to products.Within the relevant range of output, you determine that the following fixed factory overheadcosts per month should occur: engineering support, $15,000; insurance on the manufacturing facility, $5,000; property taxes on the manufacturing facility, $12,000; depreciation on manufacturingequipment, $13,800; and indirect labor costs of supervisory salaries, $14,800, setup labor, $2,400,and materials handling, $2,500. Variable factory overhead costs are budgeted at $21.00 per machinehour, as follows: electricity, $8.00; indirect materials for Material A of $1.00 and for Material B of$4.00; indirect labor—maintenance, $6.00; and production-related supplies, $2.00.Required1. Prepare a flexible budget for Johnny Lee for each of the following monthly levels of machine hours:(a) 4,000, (b) 5,000, and (c) 6,000. (Hint: Provide in your response a separate line for each of the factoryoverhead costs for the company.)2. Generate an equation to represent, within the relevant range, the factory overhead costs per month forJohnny Lee (state the variable overhead cost rate to 2 decimal places). Use this equation to estimatemonthly total overhead cost for machine hours of 3,000 to 6,000, in increments of 500.3. Use the Chart function in Excel to generate a graphical representation of the monthly factory overheadcost function for Johnny Lee over the range of 3,000-6,000 machine hours per month
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Flexible
of lawnmowers, to snowblowers, to garden tools (such as tillers and weed-whackers). The basic
product line consists of three different models, each meant to fill the needs of a different market.
Assume you are the cost accountant for this company and that you have been asked by the owner
of the company to construct a flexible budget for
faster than revenues. Currently, the company uses machine hours (MHs) as the basis for assigning
both variable and fixed factory overhead costs to products.
Within the relevant range of output, you determine that the following fixed factory overhead
costs per month should occur: engineering support, $15,000; insurance on the manufacturing facility, $5,000; property taxes on the manufacturing facility, $12,000;
equipment, $13,800; and indirect labor costs of supervisory salaries, $14,800, setup labor, $2,400,
and materials handling, $2,500. Variable factory overhead costs are budgeted at $21.00 per machine
hour, as follows: electricity, $8.00; indirect materials for Material A of $1.00 and for Material B of
$4.00; indirect labor—maintenance, $6.00; and production-related supplies, $2.00.
Required
1. Prepare a flexible budget for Johnny Lee for each of the following monthly levels of machine hours:
(a) 4,000, (b) 5,000, and (c) 6,000. (Hint: Provide in your response a separate line for each of the factory
overhead costs for the company.)
2. Generate an equation to represent, within the relevant range, the factory overhead costs per month for
Johnny Lee (state the variable overhead cost rate to 2 decimal places). Use this equation to estimate
monthly total overhead cost for machine hours of 3,000 to 6,000, in increments of 500.
3. Use the Chart function in Excel to generate a graphical representation of the monthly factory overhead
cost function for Johnny Lee over the range of 3,000-6,000 machine hours per month
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