Question

Asper Company has recently introduced budgeting as an integral part of its corporate planning process. An inexperienced member of the accounting staff was given the assignment of constructing a flexible budget for manufacturing overhead costs and prepared it in the format that follows:

Percentage of Capacity	80%	100%
Machine-hours	44,000	55,000
Utilities	$ 48,600	$ 58,500
Supplies	4,400	5,500
Indirect labour	8,800	11,000
Maintenance	36,600	41,000
Supervision	15,000	15,000
Total manufacturing overhead cost	$ 113,400	$ 131,000

The company assigns manufacturing overhead costs to production on the basis of standard machine-hours. The cost formulas used to prepare the budgeted figures above are relevant over a range of 80% to 100% of capacity in a month. The managers who will be working under these budgets have control over both fixed and variable manufacturing overhead costs.

1. Use the high–low method to separate fixed and variable costs. (Round variable cost answers to 2 decimal places.)

2. Come up with a single cost formula for all overhead costs based on your analysis in requirement 1 above. (Hint: Your cost formula should be of the form: y = a + bx.) (Round variable cost answer to 2 decimal places.)

3. During May, the company operated at 87% of machine-hour capacity. Actual manufacturing overhead costs incurred during the month were as follows:

Utilities	$ 50,140
Supplies	6,850
Indirect labour	10,690
Maintenance	34,410
Supervision	15,000
Total actual manufacturing overhead cost	$117,090

Fixed costs had no budget variances. Prepare an overhead performance report for May. Include both fixed and variable costs in your report (in separate sections). Structure your report so that it shows only a spending variance for variable overhead. The company originally budgeted to work 44,000 machine-hours during the month; standard hours allowed for the month’s production totalled 45,000 machine-hours. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Round "Cost Formula per MH" answers to 2 decimal places.)

Answer 1

1. Use the high–low method to separate fixed and variable costs.

Under high-low method, the cost function formula is:

.

Y = a + bx

a = fixed cost

b = variable cost

x = level of activities

.

Where,

b = ( cost @ highest level of activities - cost @ lowest level ) / ( highest level - lowest level )

Where,

cost @ highest level of activities = 131000

cost @ lowest level = 113400

highest level = 55000

lowest level = 44000

.

b = ( 131000 - 113400 ) / ( 55000 - 44000 )

b = 17600 / 11000 = 1.6

Variable overhead = 1.6 per units

Bx = Total variable overhead under 100% capacity, 55000 MH = 1.6 * 55000 = 88000

Y = total manufacturing overhead = 131000

Fixed overhead = a

Y = a + bx

a = Y - bx

Fixed overhead = 131000 - 88000 = $43000

.

2. Come up with a single cost formula for all overhead costs based on your analysis in requirement 1 above.

.

Y = a + bx

Y = total manufacturing overhead cost

A = fixed overhead = $43000

b = variable overhead = $1.6 per MH

x = level of activities

.

So, cost formula is

Y = 43000 + 1.6x

.

3. During May, the company operated at 87% of machine-hour capacity. Actual manufacturing overhead costs incurred during the month were as follows:

Utilities	$ 50,140
Supplies	6,850
Indirect labour	10,690
Maintenance	34,410
Supervision	15,000
Total actual manufacturing overhead cost	$117,090

Fixed costs had no budget variances. Prepare an overhead performance report for May. Include both fixed and variable costs in your report (in separate sections). Structure your report so that it shows only a spending variance for variable overhead. The company originally budgeted to work 44,000 machine-hours during the month; standard hours allowed for the month’s production totalled 45,000 machine-hours.

.

Budgeted total manufacturing overhead is calculated using cost formula

Y = 43000 + 1.6x

X = 87% of capacity

100% = 55000, 87% = 55000 * 87% = 47850 mh

Y = 43000 + 1.6 * 47850

Y = 43000+ 76560 = 119560

Budgeted variable overhead = 1.6 * 47850 = $76560

Budgeted fixed overhead = $43000

.

Variable overhead spending variance

Actual machine hours* Budgeted cost (47850 * 1.6)	76560
Budgeted machine hours* * budgeted cost (45000 * 1.6)	72000
Variable overhead spending variance	4560 U

Budgeted machine hours = standard hours allowed for the month’s production totalled 45,000 machine-hours are used instead of actual budged.

.

.*Actual worked machine hour are increased higher than allowed for actual production, so it is unfavorable variance.