Cook Company estimates that 300,000 direct labor hours will be worked during the
ID: 2467146 • Letter: C
Question
Cook Company estimates that 300,000 direct labor hours will be worked during the coming year, 2014, in the Packaging Department. On this basis, the budgeted manufacturing overhead cost data, shown below, are computed for the year. It is estimated that direct labor hours worked each month will range from 27,000 to 36,000 hours. During October, 27,000 direct labor hours were worked and the following overhead costs were incurred. Fixed overhead costs: supervision $8,000, depreciation $6,000, insurance $2,460, rent $2,000, and property taxes $1,500. Variable overhead costs: indirect labor $12,432, indirect materials $7,680, repairs $4,800, utilities $6,840, and lubricants $1,920. Instructions Prepare a monthly manufacturing overhead flexible budget for each increment of 3,000 direct labor hours over the relevant range for the year ending December 31, 2014. Prepare a flexible budget report for October. Comment on management's efficiency in controlling manufacturing overhead costs in October.Explanation / Answer
a) COOK COMPANY Monthly Flexible Budget for Manufacturing Overhead for the year 2014 Activity level: Direct Labor Hours 27000 30000 33000 36000 Variable costs: indirect labor ($0.42) 11340 12600 13860 15120 indirect materials ($0.30) 8100 9000 9900 10800 repairs ($0.18) 4860 5400 5940 6480 utilitites ($0.24) 6480 7200 7920 8640 lubricants ($0.06) 1620 1800 1980 2160 Total variable cost ($1.20) 32400 36000 39600 43200 Fixed Costs: supervision 8000 8000 8000 8000 depreciation 6000 6000 6000 6000 insurance 2500 2500 2500 2500 rent 2000 2000 2000 2000 property taxes 1500 1500 1500 1500 Total fixed costs 20000 20000 20000 20000 Total Costs 52400 56000 59600 63200 b) Manufacturing Overhead Flexible Budget Report for October Budget @ Actual @ (F)/(U) 27000 DLH 27000 DLH Difference Variable costs: indirect labor ($0.42) 11340 12432 1092 U indirect materials ($0.30) 8100 7680 420 F repairs ($0.18) 4860 4800 60 F utilitites ($0.24) 6480 6840 360 U lubricants ($0.06) 1620 1920 300 U Total variable cost ($1.20) 32400 33672 1272 U Fixed Costs: supervision 8000 8000 0 depreciation 6000 6000 0 insurance 2500 2460 40 F rent 2000 2000 0 property taxes 1500 1500 0 Total fixed costs 20000 19960 40 F Total Costs 52400 53632 1232 U c) Comment on Management's efficiency in controlling manufactuing overhead costs in October: The total fixed costs are slightly above budget; the variation being negligible and favorable. The variation is on insurance expense. The variable costs on indirect labor, utilities and lubricants have increased during the month. The cost per unit on these items when compared to budget are: cost per unit % budget actual increase indirect labor 0.42 0.46 9% utilities 0.24 0.25 5% lubricants 0.06 0.07 16% The expenditure on the above items is to be investigated to find the reason for the increase. The increase in indirect labor and lubricants is high.