Gibralter Insurance Company uses a flexible overhead budget for its application-processing department. The firm offers five types of policies, with the following standard hours allowed for clerical processing.
Automobile | 1 hour |
Renter’s | 1 hour |
Homeowner’s | 2 hours |
Health | 2 hours |
Life | 5 hours |
The following numbers of insurance applications were processed during July.
Automobile | 250 |
Renter’s | 200 |
Homeowner’s | 100 |
Health | 400 |
Life | 200 |
The controller estimates that the variable-overhead rate in the application-processing department is $4.00 per hour, and that fixed-overhead costs will amount to $2,000 per month.
Required:
1. How many standard clerical hours are allowed in July, given actual application activity?
2. Why would it not be sensible to base the company’s flexible budget on the number of applications processed instead of the number of clerical hours allowed?
3. Construct a formula flexible overhead budget for the company.
4. What is the flexible budget for total overhead cost in July?
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