Question

Rensing Groomers is in the dog-grooming business. Its operating cists are described by the following formulas: Grooming supplies (variable) y = 0 +5 Direct labor (variable) y = 0 + 14x, Overhead (mixed) y = 10,000 +1x Milo the owner has determinned that direct labor is the cost dirver for all three categories of costs. Prepare a flexible budget for activity levels of 550,600, and 700 direct labor hous. Eplain why the flexible budget is more informatiive thatn the static budget. Calculate the total cost per direct labor hour at cash of the activity levels specified in part (a). The groomers at Rensing normally owrk a total of 650 direct labor hours during each moth. Each grooming job mormally takes a groomer 1.3 hours . Milo wants to earn a profit equal to 40% of the costs incurred determine what he should charge each pet owner fo rgrooming

Answer 1

a. Preparation of Flexible Budget.

Particulars	550 Hours	600 Hours	700 Hours
Grooming Supplies	5 x 550 = 2,750	5 x 600 = 3,000	5 x 700 = 3,500
Direct Labor	14 x 550 = 7,700	14 x 600 = 8,400	14 x 700 = 9,800
Variable Overheads	1 x 550 = 550	1 x 600 = 600	1 x 700 = 700
Total Variable Cost	11,000	12,000	14,000
Fixed Overheads	10,000	10,000	10,000
Total Cost	21,000	22,000	24,000

Under flexbile budget, profitability and expenses can be provided at standard rate for each level of activity whereas, in static budget the same is provided for fixed level of activity. Therefore, Flexible budget is more informative for decision making purposes to the management than static budget.

b. Calculation of price to be charged for each job

Calculation of Cost at 650 Hours of activity.

	Amount
Material	3,250
Labor	9,100
Overheads Variable	650
Total Variable Cost	13,000
Fixed Overheads	10,000
Total Cost	23,000

Total Price to be charged on 650 hours = 23,000 + (23,000 x 40%) = 32,200

Number of Job = total hours / time taken by each job

= 650 / 1.3 = 500 jobs

Price of each job = 32,200 / 500 = $64,4 per job