Rensing Groomers is in the dog-grooming business. Its operating costs are descri
ID: 2369875 • Letter: R
Question
Rensing Groomers is in the dog-grooming business. Its operating costs are described by the following formulas:
Grooming supplies (variable) y = $0 + $4x
Direct labor (variable) y = $0 + $12x
Overhead (mixed) y = $8,000 + $1x
Milo, the owner, has determined that direct labor is the cost driver for all three categories of costs.
Instructions
(a) Prepare a flexible budget for activity levels of 550, 600, and 700 direct labor hours.
(b) Explain why the flexiable budget is more informative than the static budget.
(c) Calculate the total cost per direct labor hour at each of the activity levels specified in part (a).
(d)The groomers at Rensing normally work a total of 650 direct labor hours during each month. Each grooming job normally takes a groomer 1 1/4 hours. Milo wants to earn a profit equal to 40% of the costs incurred. Determine what she should charge each pet owner for grooming.
Explanation / Answer
Req B: Statis budget is prepared for single level of activity. And if the same level of activity is not attained, then the whole exercise of preparing the budgets will be defeated. Mreover, the controls cannot be able to exercice on the departments.
Therefore, the flexible budgets are prepared to provide budgetray information for two or more level of activities, which may likely to be achieved in the next budgeted year.
The Flexible budget is more inormative for the new business people where they does not have the data to actually predict the future level of activities. So, in such situations, the Flexible budget is having an advantage more other Static Budget.
Req A: The 'X' given in cost formula is the direct labour hours given for each activity. Therefore, It is imperative and given in the problem, The Variable cost per labour hour is as follows: Grooming Supplies: $4 per labour hour Direct Labour $12 per labour hour Overheads (Variable portion) $1 per labour hour Fixed cost is as follows: Overheads (fixed portion): $ 8,000 FLEXIBLE BUDGET ACTIVITY IN TERMS OF LABOUR HOURS 550 hours 600 hours 700 hours Variable cost: Grooming Supplies (@$4 per labour hour) 2200 2400 2800 Direct labour (@$12 per labour hour) 6600 7200 8400 Overheads (@$ 1 per labour hour) 550 600 700 Total variable cost 9350 10200 11900 Fixed cost: Overheads 8000 8000 8000 Total Fixed cost 8000 8000 8000 Budgeted Total cost 17350 18200 19900