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
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
Maintenance supplies 300
Other supplies 200
Payroll taxes 800
Small tools 300 2,000
Total standard factory overhead $9,000
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.