Question

Trago Company manufactures a single product and has a JIT policy that ending inventory must equal 10% of the next month's sales. It estimates that May's ending inventory will consist of 29,600 units. June and July sales are estimated to be 296,000 and 306,000 units, respectively. Trago assigns variable overhead at a rate of $3.40 per unit of production. Fixed overhead equals $416,000 per month. Compute the budgeted total factory overhead for June.

Answer 1

The budgeted total factory overhead for June is calculated by adding fixed overhead costs of $416,000 to variable overhead costs for 297,000 units at $3.40 per unit, resulting in a total of $1,425,800.

Step-by-step explanation:

To calculate the budgeted total factory overhead for June, we need to add the fixed overhead costs to the variable overhead costs. The fixed overhead for Trago Company is given as $416,000 per month, which remains the same regardless of production levels. The variable overhead rate is $3.40 per unit. According to the JIT policy, the ending inventory for June will be 10% of July's sales, which means 30,600 units (10% of 306,000 units).

To find out the total number of units needed for June, we add the sales for June to the ending inventory for June, and then subtract the beginning inventory, which is May's ending inventory. Hence, we have (296,000 units + 30,600 units) - 29,600 units = 297,000 units. Therefore, the variable overhead costs for June will be 297,000 units × $3.40/unit.

The total factory overhead costs for June can be calculated as: $416,000 (fixed costs) + (297,000 units × $3.40/unit) (variable costs). By doing the math, the variable overhead comes to $1,009,800, and adding the fixed overhead, the total factory overhead for June would be $1,425,800.