P7-6 Presented below are the monthly factory overhead cost budget (at normal capacity of 5,000 units

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.