P7-6
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.
Factory Overhead Cost Budget
Fixed cost:
Depreciation on building and machinery 1,200
Taxes on building and machinery 500
Insurance on building and machinery 500
Superintendent’s salary 1,500
Supervisors’ salaries 2,300
Maintenance wages 1,000 7,000
Variable cost:
Repairs 400
Maintenance supplies 300
Other supplies 200
Payroll taxes 800
Small tools 300 2,000
Total standard factory overhead $9,000
Required:
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 rate for application of factory overhead to work in process at each level of volume in both units and direct labor hours.
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 fixed expenses).
a. At 110% of capacity, an assistant department head will be needed at a salary of $10,500 annually.
b. At 80% of capacity, the repairs expense will drop to one-half of the amount at 100% capacity.
c. Maintenance supplies expense will remain constant at all levels of production.
d. At 80% of capacity, one part-time maintenance worker, earning $6,000 a year, will be laid off.
e. 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 ten-year life, and straight-line depreciation will be taken.
3. Using the facts and the flexible budget prepared in 1, determine the budgeted cost at 96% of capacity, using interpolation.
4. Using the flexible budget prepared in 1, determine the budgeted cost at 104% capacity, using a method other than interpolation.