Question

Flexible Budget

In an attempt to improve budgeting, the controller for Meliore, Inc., has developed a flexible budget for overhead costs. Meliore, Inc., makes two types of products, the standard model and the deluxe model. Meliore expects to produce 400,000 units of the standard model and 140,000 units of the deluxe model during the coming year. The standard model requires 0.10 direct labor hour per unit, and the deluxe model requires 0.16. The controller has developed the following cost formulas for each of the four overhead items:

	Cost Formula
Maintenance	$34,300 + $1.25 DLH
Power	$0.50 DLH
Indirect labor	$68,500 + $2.30 DLH
Rent	$31,100

Required:

1. Prepare an overhead budget for the expected activity level for the coming year.

Meliore, Inc.
Overhead Budget
For the Year Ended December 31
	Per DLH
Budgeted direct labor hours		DLH
Variable costs:
Maintenance	$	$
Power
Indirect labor
Total variable costs			$
Fixed costs:
Maintenance		$
Indirect labor
Rent
Total fixed costs
Total overhead costs			$

2. Prepare an overhead budget that reflects production that is 10 percent higher than expected (for both products).

Meliore, Inc.
Overhead Budget
For the Year Ended December 31
	Per DLH
Budgeted direct labor hours		DLH
Variable costs:
Maintenance	$	$
Power
Indirect labor
Total variable costs			$
Fixed costs:
Maintenance		$
Indirect labor
Rent
Total fixed costs
Total overhead costs			$

Prepare an overhead budget for production that is 20 percent lower than expected.

Meliore, Inc.
Overhead Budget
For the Year Ended December 31
	Per DLH
Budgeted direct labor hours		DLH
Variable costs:
Maintenance	$	$
Power
Indirect labor
Total variable costs			$
Fixed costs:
Maintenance		$
Indirect labor
Rent
Total fixed costs
Total overhead costs			$

Answer 1

1	Overhead budget for the expected activity level for year Ended Dec. 31 for estimated Production
	Particulars	Standard model	Delux Model	Total
	No. of units	400000	140000
	Budgeted direct labor hours @ .10 hr for Standard & 0.16 hr per Delux	40000	22400
	Variable costs:
	Maintenance @ 1.25 Direct Labour Hour (DLH)	$50,000.00	$28,000.00	$78,000.00
	Power @ 0.5 Direct Labour Hour (DLH)	$20,000.00	$11,200.00	$31,200.00
	Indirect labor @ 2.3 Direct Labour Hour (DLH)	$92,000.00	$51,520.00	$1,43,520.00
	Total variable costs	$1,62,000.00	$90,720.00	$2,52,720.00
	Fixed costs: A			$0.00
	Maintenance			$34,300.00
	Indirect labor			$68,500.00
	Rent			$31,000.00
	Total fixed costs B	$0.00	$0.00	$1,33,800.00
	Total overhead costs A + B	$1,62,000.00	$90,720.00	$3,86,520.00
2	Overhead budget for the expected activity level for year Ended Dec. 31 for 10 percent Higher than estimated Production
	Particulars	Standard model	Delux Model	Total
	No. of units * 110%	440000	154000
	Budgeted direct labor hours @ .10 hr for Standard & 0.16 hr per Delux	44000	24640
	Variable costs:
	Maintenance @ 1.25 Direct Labour Hour (DLH)	$55,000.00	$30,800.00	$85,800.00
	Power @ 0.5 Direct Labour Hour (DLH)	$22,000.00	$12,320.00	$34,320.00
	Indirect labor @ 2.3 Direct Labour Hour (DLH)	$1,01,200.00	$56,672.00	$1,57,872.00
	Total variable costs	$1,78,200.00	$99,792.00	$2,77,992.00
	Fixed costs: A			$0.00
	Maintenance			$34,300.00
	Indirect labor			$68,500.00
	Rent			$31,000.00
	Total fixed costs B	$0.00	$0.00	$1,33,800.00
	Total overhead costs A + B	$1,78,200.00	$99,792.00	$4,11,792.00
	Overhead budget for the expected activity level for year Ended Dec. 31 for 20 percent Lower than estimated Production
	Particulars	Standard model	Delux Model	Total
	No. of units * 80%	320000	112000
	Budgeted direct labor hours @ .10 hr for Standard & 0.16 hr per Delux	32000	17920
	Variable costs:
	Maintenance @ 1.25 Direct Labour Hour (DLH)	$40,000.00	$22,400.00	$62,400.00
	Power @ 0.5 Direct Labour Hour (DLH)	$16,000.00	$8,960.00	$24,960.00
	Indirect labor @ 2.3 Direct Labour Hour (DLH)	$73,600.00	$41,216.00	$1,14,816.00
	Total variable costs A	$1,29,600.00	$72,576.00	$2,02,176.00
	Fixed costs:
	Maintenance			$34,300.00
	Indirect labor			$68,500.00
	Rent			$31,000.00
	Total fixed costs B	$0.00	$0.00	$1,33,800.00
	Total overhead costs A + B	$1,29,600.00	$72,576.00	$3,35,976.00