Question

Indigo Company uses a flexible budget for manufacturing overhead based on direct labor hours. Budgeted variable manufacturing overhead costs per direct labor hour are as follows. Budgeted fuxed overhead costs per month are Supervision $4,800. Depreciation $1,440, and Property Taxes $960. The company believes it will normally operate in a range of 8,400−12,000 direct labor hours per month. Prepare a monthly manufacturing overhead flexible budget for 2022 for the expected range of activity, using increments of 1,200 direct labor hours. (List variable costs before fixed costs) Monthly Manufacturing Overhead Flexible Budget For the Year 2022 $

Answer 1

To prepare a flexible budget for Indigo Company's manufacturing overhead, one must consider the company's fixed costs along with variable costs per direct labor hour. The total costs at various levels of production can then be calculated by adding the fixed costs to the variable costs multiplied by the expected direct labor hours, showing how 'spreading the overhead' reduces the average fixed cost per unit.

Step-by-step explanation:

The question pertains to preparing a flexible budget for Indigo Company, which requires understanding the total costs, consisting of both fixed costs and variable costs. To prepare a monthly manufacturing overhead flexible budget, one must account for all expected variable and fixed overhead costs at various levels of direct labor hours.

Using the provided fixed costs for Supervision ($4,800), Depreciation ($1,440), and Property Taxes ($960), and considering the range of 8,400 to 12,000 direct labor hours, we would create a budget at increments of 1,200 labor hours. Assuming variable costs are already known per labor hour, each increment would have a total of fixed costs (which remain constant regardless of hours) added to the variable costs multiplied by the labor hours at that increment.

As an example, if the variable cost per labor hour is $X, for 8,400 hours, the total variable cost would be 8,400 multiplied by $X. This is then added to the total fixed costs ($4,800 + $1,440 + $960) to get the total overhead cost for that level of production. This process is repeated for each increment of 1,200 hours up to 12,000 hours.

To explain the concept of 'spreading the overhead', consider if the fixed cost is $1,000. The average fixed cost curve would show a downward slope, indicating that as the quantity of output produced increases, the average fixed cost per unit of output decreases. This demonstrates the principle of fixed costs being spread over more units of output as production rises.

Answer 2

To prepare a monthly manufacturing overhead flexible budget for 2022, we need to determine the variable and fixed overhead costs based on the budgeted direct labor hours. The fixed overhead costs are provided, but the variable costs are not given. We can assume a certain cost per direct labor hour within the expected range and use that amount for the variable costs.

Step-by-step explanation:

To prepare a monthly manufacturing overhead flexible budget for 2022, we need to determine the variable and fixed overhead costs based on the budgeted direct labor hours. The budgeted variable manufacturing overhead costs are not provided in the question, so we cannot calculate the exact value. However, we can use the given information to understand the approach. The fixed overhead costs are provided as Supervision $4,800, Depreciation $1,440, and Property Taxes $960 per month.

Since we don't have the exact variable costs, we will consider them as unknowns. To create the budget, we can assume a certain cost per direct labor hour and use that amount for the variable costs. We will multiply this assumed variable cost by the number of direct labor hours for each activity level within the expected range (8,400−12,000 direct labor hours per month) to calculate the total variable overhead costs.

Below is an example of how the budget could be structured with assumed variable costs:

Direct Labor HoursVariable CostsFixed CostsTotal Costs8,400Assumed Variable Cost * 8,400Supervision $4,800
Depreciation $1,440
Property Taxes $960Calculate Total9,600Assumed Variable Cost * 9,600Supervision $4,800
Depreciation $1,440
Property Taxes $960Calculate Total10,800Assumed Variable Cost * 10,800Supervision $4,800
Depreciation $1,440
Property Taxes $960Calculate Total12,000Assumed Variable Cost * 12,000Supervision $4,800
Depreciation $1,440
Property Taxes $960Calculate Total

By completing the calculation for the total costs, we can create a monthly manufacturing overhead flexible budget for 2022 based on the expected range of direct labor hours.