P7-7 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.
Factory Overhead budget
Depreciation on building and machinery $1,200
Taxes on building and machinery 500
Insurance on building and machinery 500
Superintendent 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 of 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 proportions to the change in volume, but with the following exceptions. (Hint: Set up a third category for semifixed 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. (At other levels it is perfectly variable.)
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.
Flexible budget is created in excel so the student has a template for future problems.