Chapter 7, Problem 10P

1.

To determine

Prepare the flexible budget for the production levels of 80%, 90% and 110% of normal capacity and calculate the predetermined factory overhead rate at each level of volume in both units and direct labor hours.

Explanation of Solution

Prepare the factory overhead cost budget.

Factory overhead cost budget
Percent of normal capacity	80%	90%	110%
Number of units	8,000	9,000	11,000
Number of standard direct labor hours	24,000	27,000	33,000
Budgeted factory overhead:
Fixed cost:
Depreciation on building and machinery	$ 1,800	$ 1,800	$ 1,800
Taxes on building and machinery	$ 750	$ 750	$ 750
Insurance on building and machinery	$ 800	$ 800	$ 800
Superintendent's salary	$ 4,400	$ 4,400	$ 4,400
Supervisors' salaries	$ 6,200	$ 6,200	$ 6,200
Maintenance wages	$ 1,500	$ 1,500	$ 1,500
Total fixed cost	$ 15,450	$ 15,450	$ 15,450
Variable cost:
Repairs $\left(\frac{\$0.02}{30,000\text{ dlh}}\right)$	$ 480	$ 540	$ 660
Maintenance supplies  $\left(\frac{\$0.15}{30,000\text{ dlh}}\right)$	$ 360	$ 405	$ 495
Other supplies $\left(\frac{\$0.01}{30,000\text{ dlh}}\right)$	$ 240	$ 270	$ 330
Payroll taxes $\left(\frac{\$0.04}{30,000\text{ dlh}}\right)$	$ 960	$ 1,080	$ 1,320
Small tools $\left(\frac{\$0.015}{30,000\text{ dlh}}\right)$	$ 480	$ 540	$ 660
Total variable cost	$ 2,520	$ 2,835	$ 3,465
Total factory overhead cost	$ 17,970	$ 18,285	$ 18,915

Table (1)

Calculate the predetermined factory overhead rate.

$\begin{array}{c}\text{Predetermined factory overhead rate}=\frac{\text{Total standard factory overhead}}{\text{Number of units}}\\ =\frac{\$18,600}{10,000\text{ units}}\\ =\$1.86\text{ per unit}\end{array}$

2.

To determine

Prepare the flexible budget for the production levels of 80%, 90% and 110% by assuming that the variable costs will differ in the portion to the change in volume with certain exceptions.

Explanation of Solution

Prepare the factory overhead cost budget.

Factory overhead cost budget
Percent of normal capacity	80%	90%	110%
Number of units	8,000	9,000	11,000
Budgeted factory overhead:
Fixed cost:
Taxes on building and machinery	$ 750	$ 750	$ 750
Insurance on building and machinery	$ 800	$ 800	$ 800
Superintendent's salary	$ 4,400	$ 4,400	$ 4,400
Total fixed cost	$ 5,950	$ 5,950	$ 5,950
Semi variable cost:
Depreciation of building and machinery (1)	$ 1,800	$ 1,800	$ 1,950
Supervisor’s salaries (2)	$ 6,200	$ 6,200	$ 8,450
Maintenance wages (3)	$ 750	$ 1,500	$ 1,500
Repairs (4)	$ 300	$ 540	$ 660
Total semi variable cost	$9,050	$10,040	$12,560
Variable cost:
Other supplies	$240	$270	$330
Payroll taxes	$960	$1,080	$1,320
Small tools	$480	$540	$660
Maintenance supplies	$360	$405	$495
Total variable cost	$2,040	$2,295	$2,805
Total factory overhead cost	$17,040	$18,285	$21,315

Table (2)

Working note (1): Calculate the semivariable cost for depreciation of building and machinery for 110%.

$\begin{array}{c}\text{Semivariable cost for depreciation of building and machinery}=\$1,800+\left(\frac{\$18,000}{120\text{ months}}\right)\\ =\$1,950\end{array}$

Working note (2): Calculate the semivariable cost for supervisors’ salaries for 110%.

$\begin{array}{c}\text{Semivariable cost for supervisors' salaries}=\$6,200+\left(\frac{\$27,000}{12\text{ months}}\right)\\ =\$8,450\end{array}$

Working note (3): Calculate the semivariable cost for Maintenance wages for 80%.

$\begin{array}{c}\text{Semivariable cost for Maintenance wages}=\$1,500-\left(\frac{\$9,000}{12\text{ months}}\right)\\ =\$750\end{array}$

Working note (4): Calculate the semivariable cost for repairs for 80%.

$\begin{array}{c}\text{Semivariable cost for repairs}=\$600\times \frac{1}{2}\\ =\$300\end{array}$