Question

1. Linda is selling rice krispy treats for $10 per tin.

She had originally budgeted a cost of $8 per tin, which includes $6 of direct material and $1.50 of direct labor. Annual manufacturing overhead is estimated at $100,000 for the expected sales of 200,000 tins. Operating expenses are projected to be $80,000 annually.

You approximate that 85% of manufacturing overhead and 20% of operating expenses are variable costs.

Linda has asked for you to calculate a flexible manufacturing overhead budget assuming an annual level of 230,000 units instead of 200,000.

Your first task consists of the following: Linda wants to know if you can make a flexible budgets that is calculated on a monthly basis for 20,000 units. What would be the total fixed manufacturing overhead costs for this new level?

Also, given an annual master budget of 200,000 units with actual production of 210,000 units, you have been asked by Linda to formulate a flexible budget report. What will be the total manufacturing overhead costs at the budgeted level?

Answer 1

Yes, a flexible budget can be made on a monthly basis for an activity level of 20,000 units.

Fixed manufacturing overhead = $ 15,000

Variable manufacturing overhead = $ 85,000 / 200,000 tins = $ 0.425 per tin

Total fixed manufacturing overhead per month (20,000 units) = $ 15,000 / 12 = $ 1,250.

Flexible Budget Report

	Flexible Budget	Volume Variance	Static Budget
Activity Level	210,000 units		200,000 units
Sales	$ 2,100,000	$ 100,000 F	$ 2,000,000
Variable Costs
Direct Materials	1,260,000	60,000 U	1,200,000
Direct Labor	315,000	15,000 U	300,000
Variable Manufacturing Overhead	89,250	4,250 U	85,000
Operating Expenses	16,800	800 U	16,000
Total Variable Costs	1,681,050	80,050 U	1,601,000
Contribution Margin	418,950	19,950 F	399,000
Less: Fixed
Manufacturing Overhead	15,000	NA	15,000
Operating Expenses	64,000	NA	64,000
Total Fixed Costs	79,000	NA	79,000
Net Operating Income	339,950	19,950 F	320,000