Chapter 7, Problem 9P

Flexible budget for factory overhead

Presented below are the monthly factory overhead cost budget (at normal capacity of 5,000 units or 20,000 direct labor hours) and the production and cost data for a month. The predetermined overhead rate is based on normal capacity.

Required:

1. 1. Assuming that variable costs will vary in direct proportion to the change in volume, prepare a flexible budget for production levels of 80%, 90%, and 110% of normal capacity. Also determine the predetermined factory overhead rate at each level of volume in both units and direct labor hours.
   1. 2. Prepare a flexible budget for production levels of 80%, 90%, and 110%, assuming that variable costs will vary in direct proportion to the change in volume, but with the following exceptions. (Hint: Set up a third category for semi-variable expenses.)
      1. a. At 110% of capacity, another supervisor will be needed at a salary of $24,000 annually.
      2. b. At 80% of capacity, the repairs expense will drop to one-half of the amount at 100% capacity.
      3. c. At 80% of capacity, one part-time maintenance worker, earning $10,000 a year, will be laid off.
      4. d. At 110% of capacity, a machine not normally in use and on which no depreciation is normally recorded will be used in production. Its cost was $12,000, it has a 10-year life, and straight-line depreciation will be taken.

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	4,000	4,500	5,500
Number of standard direct labor hours	16,000	18,000	22,000
Budgeted factory overhead:
Fixed cost:
Depreciation on building and machinery	$ 1,200	$ 1,200	$ 1,200
Taxes on building and machinery	$ 500	$ 500	$ 500
Insurance on building and machinery	$ 500	$ 500	$ 500
Superintendent's salary	$ 3,000	$ 3,000	$ 3,000
Supervisors' salaries	$ 4,600	$ 4,600	$ 4,600
Maintenance wages	$ 2,000	$ 2,000	$ 2,000
Total fixed cost	$ 11,800	$ 11,800	$ 11,800
Variable cost:
Repairs $\left(\frac{\$0.02}{20,000\text{ dlh}}\right)$	$ 320	$ 360	$ 440
Maintenance supplies  $\left(\frac{\$0.15}{20,000\text{ dlh}}\right)$	$ 240	$ 270	$ 330
Other supplies $\left(\frac{\$0.01}{20,000\text{ dlh}}\right)$	$ 160	$ 180	$ 220
Payroll taxes $\left(\frac{\$0.04}{20,000\text{ dlh}}\right)$	$ 640	$ 720	$ 880
Small tools $\left(\frac{\$0.015}{20,000\text{ dlh}}\right)$	$ 240	$ 270	$ 330
Total variable cost	$ 1,600	$ 1,800	$ 2,200
Total factory overhead cost	$ 13,400	$ 13,600	$ 14,000

Table (1)

Calculate the predetermined factory overhead rate.

$\begin{array}{c}\text{Predetermined factory overhead rate}=\frac{\text{Total standard factory overhead}}{\text{Number of units}}\\ =\frac{\$13,800}{5,000\text{ units}}\\ =\$2.76\text{ per unit}\end{array}$

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	4,000	4,500	5,500
Budgeted factory overhead:
Fixed cost:
Taxes on building and machinery	$ 500	$ 500	$ 500
Insurance on building and machinery	$ 500	$ 500	$ 500
Superintendent's salary	$ 3,000	$ 3,000	$ 3,000
Total fixed cost	$ 4,000	$ 4,000	$ 4,000
Semi variable cost:
Depreciation of building and machinery (1)	$ 1,200	$ 1,200	$ 1,300
Supervisor’s salaries (2)	$ 4,600	$ 4,600	$ 6,600
Maintenance wages (3)	$ 1,167	$ 2,000	$ 2,000
Repairs (4)	$ 200	$ 360	$ 440
Total semi variable cost	$7,167	$8,160	$10,340
Variable cost:
Other supplies	$160	$180	$220
Payroll taxes	$640	$720	$880
Small tools	$240	$270	$330
Maintenance supplies	$240	$270	$330
Total variable cost	$1,280	$1,440	$1,760
Total factory overhead cost	$12,447	$13,600	$16,100

Table (2)

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

$\begin{array}{c}\text{Semivariable cost for depreciation of building and machinery}=\$1,200+\left(\frac{\$12,000}{120\text{ months}}\right)\\ =\$1,300\end{array}$

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

$\begin{array}{c}\text{Semivariable cost for supervisors' salaries}=\$4,600+\left(\frac{\$24,000}{12\text{ months}}\right)\\ =\$6,600\end{array}$

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

$\begin{array}{c}\text{Semivariable cost for Maintenance wages}=\$2,000-\left(\frac{\$10,000}{12\text{ months}}\right)\\ =\$1,167\end{array}$

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

$\begin{array}{c}\text{Semivariable cost for repairs}=\$400\times \frac{1}{2}\\ =\$200\end{array}$