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 110,000 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	$34,600 + $1.25 DLH
Power	$0.50 DLH
Indirect labor	$68,500 + $2.30 DLH
Rent	$31,700

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			$

Feedback

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			$

Feedback

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

Solution:

Meliore Inc

Flexible budgets –

1. Overhead budget for the expected level for the coming year:

Meliore Inc
Overhead Budget
For the year ended Dec 31, 2018
	Per DLH	Variable Cost	Total
Budgeted direct labor hours			57,600 dLH
variable costs:
maintenance	$1.25	$72,000
power	$0.50	$28,800
indirect labor	$2.30	$132,480
Total variable costs	$4.05		$233,280
Fixed Costs:
maintenance		$34,600
indirect labor		$68,500
Rent		$31,700
Total fixed costs			$134,800
Total overhead cost			$368,080

Total budgeted direct labor hours = (400,000 x 0.10 DLH) + (110,000 x 0.16DLH) = 57,600 DLH

1. Overhead budget that reflects production that is 10% higher than expected for both products:

Production –

Standard = 400,000 + 10% 400,000 = 440,000 unit

DLH = 440,000 x 0.10 = 44,000 DLH

Deluxe = 110,000 + 10% 110,000 = 121,000 units

DLH = 121,000 x 0.16 = 19,360DLH

Budgeted direct labor hours =44,000 + 19,360 = 63,360

Meliore Inc
Overhead Budget
For the year ended Dec 31, 2018
	Per DLH	Variable Cost	Total
Budgeted direct labor hours			63,360 DLH
variable costs:
maintenance	$1.25	$79,200
Power	$0.50	$31,680
indirect labor	$1.70	$145,728
Total variable costs	$4.05		$256,608
Fixed Costs:
maintenance		$34,600
indirect labor		$68,500
Rent		$31,700
Total fixed costs			$134,800
Total overhead cost			$391,408

1. Overhead budget for production that is 20% lower than expected:

Production –

Standard = 400,000 - 20% 400,000 = 320,000 units

DLH = 320,000 x 0.10 = 32,000 DLH

Deluxe = 110,000 - 20% 110,000 = 88,000 units

DLH = 88,000 x 0.16 = 14,080 DLH

Budgeted direct labor hours =32,000 + 14,080 = 46,080 DLH

For the year ended Dec 31, 2018
	Per DLH	Variable Cost	Total
Budgeted direct labor hours			46,080 DLH
variable costs:
maintenance	$1.25	$57,600
power	0.50	$23,040
indirect labor	$2.30	$105,984
Total variable costs	$4.05		$186,624
Fixed Costs:
maintenance		$34,600
indirect labor		$68,500
Rent		$31,700
Total fixed costs			$134,800
Total overhead cost			$321,424