Question

Johnny Lee Incorporated produces a line of small gasoline-powered engines that can be used in a variety of residential machines, ranging from different types of lawnmowers, to snowblowers, to garden tools (such as tillers and weed-whackers). The basic product line consists of three different models, each meant to fill the needs of a different market. Assume you are the cost accountant for this company and that you have been asked by the owner of the company to construct a flexible budget for factory overhead costs, which seem to be growing faster than revenues. Currently, the company uses machine hours (MHs) as the basis for assigning both variable and fixed factory overhead costs to products. Within the relevant range of output, you determine that the following factory fixed overhead costs per month should occur: engineering support, $15,100; insurance on the manufacturing facility, $5,100; property taxes on the manufacturing facility, $12,100; depreciation on manufacturing equipment, $13,900; and indirect labor costs of supervisory salaries, $14,900, setup labor, $2,500, and materials handling, $2,600. Variable factory overhead costs are budgeted at $26.00 per machine hour, as follows: electricity, $9.00; indirect materials for Material A of $2.00 and for Material B of $5.00; indirect labor—maintenance, $7.00; and production-related supplies, $3.00.

Prepare a flexible budget for Johnny Lee for each of the following monthly levels of machine hours: (a) 4,100, (b) 5,100, and (c) 6,100.
Generate an equation to represent, within the relevant range, the factory overhead costs per month for Johnny Lee. Use this equation to estimate monthly total overhead cost for machine hours of 3,100 to 6,100, in increments of 500.

Answer 1

The total fixed costs amount to $66,200, and variable costs are $26 per machine hour. The overhead cost equation is $66,200 + ($26 x MHs), which allows us to calculate costs at various levels of production.

Step-by-step explanation:

To construct a flexible budget for Johnny Lee Incorporated, we need to consider both variable and fixed costs. First, we tally the fixed costs that do not change with the level of production: engineering support ($15,100), insurance ($5,100), property taxes ($12,100), depreciation ($13,900), supervisory salaries ($14,900), setup labor ($2,500), and materials handling ($2,600). This gives us a monthly fixed cost total of $66,200.

The variable factory overhead costs are given at $26.00 per machine hour (MH), which includes electricity ($9.00), indirect materials A ($2.00), indirect materials B ($5.00), maintenance labor ($7.00), and production-related supplies ($3.00).

Using this information, we can create a flexible budget for the three different levels of machine hours:

• 
  
• (a) For 4,100 MHs: Fixed costs ($66,200) + Variable costs (4,100 MHs x $26/MH) = $172,800
• 
  
• (b) For 5,100 MHs: Fixed costs ($66,200) + Variable costs (5,100 MHs x $26/MH) = $198,800
• 
  
• (c) For 6,100 MHs: Fixed costs ($66,200) + Variable costs (6,100 MHs x $26/MH) = $224,800

To represent the factory overhead costs with an equation, we can use:

Total Overhead Cost = Fixed Costs + (Variable Cost per MH x Number of MHs)

So, the equation is Total Overhead Cost = $66,200 + ($26 x MHs). Using this equation, we can estimate the monthly total overhead cost for machine hours ranging from 3,100 to 6,100, in increments of 500 MHs.

Answer 2

The flexible budget for Johnny Lee Incorporated involves calculating total fixed costs of $64,200 and adding variable costs of $26 per machine hour to estimate total overhead costs at different machine hour levels.

Step-by-step explanation:

To prepare a flexible budget for Johnny Lee Incorporated, first we need to establish the total fixed overhead costs, which are the sum of engineering support, insurance, property taxes, depreciation, supervisory salaries, setup labor, and materials handling costs. These add up to $64,200 per month. Then, variable overhead costs are budgeted at $26.00 per machine hour.

For the specified machine hour (MH) levels of 4,100, 5,100, and 6,100, the variable costs would be:

• 4,100 MHs x $26/MH = $106,600
• 5,100 MHs x $26/MH = $132,600
• 6,100 MHs x $26/MH = $158,600

Adding the fixed costs of $64,200 to each of these amounts yields the total overhead costs at each level of machine hours:

• 4,100 MHs: $64,200 + $106,600 = $170,800
• 5,100 MHs: $64,200 + $132,600 = $196,800
• 6,100 MHs: $64,200 + $158,600 = $222,800

To estimate the total overhead cost for machine hours ranging from 3,100 to 6,100, in increments of 500, we use the equation: Total Overhead Cost = Fixed Costs + (Variable Cost per MH x Number of MHs).

Applying this equation:

• 3,100 MHs: $64,200 + ($26 x 3,100) = $144,800
• 3,600 MHs: $64,200 + ($26 x 3,600) = $157,400
• ...and so on for each increment of 500 MHs until 6,100 MHs.

This flexible budget aligns the overhead costs based on the production levels, allowing for better planning and control.