Question

Larry Miller, controller for Kipling Company, has been instructed to develop a flexible budget for overhead costs. The company produces two types of frozen desserts: Icey and Tasty. The two desserts use common raw materials in different proportions. The company expects to produce 200,000 gallons of each product during the coming year. Icey requires 0.25 direct labor hour per gallon and Tasty requires 0.30. Larry has developed the following fixed and variable costs for each of the four overhead items:

Overhead Item	Fixed Cost			Variable Rate per DLH
Maintenance	$52,000			$1.20
Power				1.50
Indirect labor	79,500			4.80
Rent	54,000

Problem 11-1

Refer to Figure 11-7.

a. Prepare an overhead budget for the expected activity level for the coming year.

Kipling Company
Overhead Budget
For the Coming Year
		Activity Level
Formula	hrs
Variable costs:
Maintenance	$1.20	$
Power	1.50
Indirect labor	4.80
Total variable costs		$
Fixed costs:
Maintenance		$
Indirect labor
Rent
Total fixed costs
Total overhead costs		$

b. Prepare an overhead budget that reflects production that is 10 percent higher than expected (for both products). Assume this quantity is within the relevant range.

Kipling Company
Overhead Budget
For the Coming Year
	Formula	hrs
Variable costs:
Maintenance	$1.20	$
Power	1.50
Indirect labor	4.80
Total variable costs		$
Fixed costs:
Maintenance		$
Indirect labor
Rent
Total fixed costs
Total overhead costs		$

c. Prepare an overhead budget that reflects production that is 10 percent lower than expected (for both products). Assume this quantity is within the relevant range.

Kipling Company
Overhead Budget
For the Coming Year
	Formula	hrs
Variable costs:
Maintenance	$1.20	$
Power	1.50
Indirect labor	4.80
Total variable costs		$
Fixed costs:
Maintenance		$
Indirect labor
Rent
Total fixed costs
Total overhead costs		$

Answer 1

Solution a:

Expected level of activity = (200000*0.25) + (200000*0.30) = 110000 hours

Kipling Company
Overhead Budget
For the Coming Year
		Activity Level
Formula	hrs	110000
Variable costs:
Maintenance	$1.20	$132,000.00
Power	$1.50	$165,000.00
Indirect labor	$4.80	$528,000.00
Total variable costs		$825,000.00
Fixed costs:
Maintenance		$52,000.00
Indirect labor		$79,500.00
Rent		$54,000.00
Total fixed costs		$185,500.00
Total overhead costs		$639,500.00

Solution b:

Kipling Company
Overhead Budget
For the Coming Year
		Activity Level
Formula	hrs	121000
Variable costs:
Maintenance	$1.20	$145,200.00
Power	$1.50	$181,500.00
Indirect labor	$4.80	$580,800.00
Total variable costs		$907,500.00
Fixed costs:
Maintenance		$52,000.00
Indirect labor		$79,500.00
Rent		$54,000.00
Total fixed costs		$185,500.00
Total overhead costs		$722,000.00

Solution c:

Kipling Company
Overhead Budget
For the Coming Year
		Activity Level
Formula	hrs	99000
Variable costs:
Maintenance	$1.20	$118,800.00
Power	$1.50	$148,500.00
Indirect labor	$4.80	$475,200.00
Total variable costs		$742,500.00
Fixed costs:
Maintenance		$52,000.00
Indirect labor		$79,500.00
Rent		$54,000.00
Total fixed costs		$185,500.00
Total overhead costs		$557,000.00