FLEXIBLE BUDGETING Archer Company manufactures backpacks, messenger bags, and rolling duffel bags.
Archer’s accountant has estimated the following cost formulas for overhead:
Indirect labor cost = $90,000 + $0.50 per direct labor hour
Maintenance = $45,000 + $0.40 per machine hour
Power = $0.15 per machine hour
Depreciation = $150,000
Other = $63,000 + $1.30 per direct labor hour
In the coming year, Archer is considering three budgeting scenarios: conservative (assumes increased competition from other companies), expected, and optimistic (assumes a particularly robust economy). Anticipated quantities sold of each type of product appear in the following table:
|
Product |
Conservative |
Expected |
Optimistic |
|
Backpacks |
50,000 |
100,000 |
150,000 |
|
Messenger bags |
20,000 |
40,000 |
80,000 |
|
Rolling duffel bags |
15,000 |
25,000 |
50,000 |
The standard amounts for one unit of each type of product are as follows:
|
|
Backpacks |
Messenger Bags |
Rolling Duffel Bags |
|
Direct materials |
$5.00 |
$4.00 |
$8.00 |
|
Direct labor hours |
1.2 hours |
1.0 hour |
2.5 hours |
|
Machine hours |
1.0 hour |
0.75 hour |
2.0 hours |
Direct labor costs $8 per hour.
Required:
1. Prepare an overhead budget for the three potential scenarios.
2. Now, suppose that the actual level of activity for the year was 120,000 backpacks, 45,000 messenger bags, and 40,000 rolling duffel bags. Actual overhead costs were as follows:
|
Indirect labor |
$230,400 |
|
Maintenance |
145,500 |
|
Power |
38,000 |
|
Depreciation |
150,000 |
|
Other |
435,350 |
Prepare a performance report for overhead costs.