In: Accounting
At the beginning for the year 2020, Shanghai Healthy Food Production Company budgeted its cost at 4 different capacity levels as follows:
Manufacturing Overheads |
Capacity Level/Usage (in mh) |
|||
10,000 |
12,000 |
15,000 |
20,000 |
|
Indirect Materials |
30,000 |
36,000 |
45,000 |
60,000 |
Depreciation |
15,000 |
15,000 |
15,000 |
15,000 |
Supervision |
23,000 |
27,000 |
33,000 |
43,000 |
Energy |
48,000 |
56,000 |
68,000 |
88,000 |
TOTAL |
116,000 |
134,000 |
161,000 |
206,000 |
A) What is the flexible budget formula for the year 2020?
B) What is the Predetermined MOH Rate (Applied MOH Rate) if the budgeted capacity is set at 18,000 mh?
Answer to Part A
Flexible budget formula for 2020 can be derived by analysing the cost nature (Variable, Fixed or Mixed) of all overhead costs given.
Indirect Material here is Variable cost with rate = 30,000 / 10,000 or 36,000 / 12,000 or 45,000 / 15,000 or 60,000 / 20,000 i.e. 3 per mh.
Depreciation is fixed throughout at 15,000 across all capacity levels.
Supervision is a mixed cost here (Fixed + Variable). Variable component can be segregated by following High-Low Method. Variable part = (43,000 - 23,000) / (20,000 - 10,000) = 2 per mh. Thus fixed part is 23,000 - 10,000 *2 = 3000.
Energy is also a mixed cost here. We segregate variable and fix part using High-Low Method. Variable Part = (88,000 - 48,000) / (20,000 - 10,000) = 4 per mh. Fixed part = 48,000 - 10,000*4 = 8,000.
Hence, Flexible Budget Formula for 2020 is :
Indirect Material + Depreciation + Supervision + Energy = (3 * Capacity Level) + 15,000 + (2 * Capacity Level + 3000) + (4 * Capacity Level + 8,000)
Answer to Part B
If the budgeted capacity is set at 18,000 mh, Total Manufacturing overhead (MOH) as per above formula would be : 1,88,000.
Hence, the Predetermined MOH Rate (Applied MOH Rate) = 1,88,000 / 18,000 mh = 10.44 per mh.