The Farmington Company has a flexible budget based on direct labor hours. At the 100,000 hours level, the budget shows the following variable overhead costs: At an activity level of 120,000 hours, total variable costs will be:
A) $19,200
B) $60,000
C) $52,800
D) $72,000

Question

The Farmington Company has a flexible budget based on direct labor hours. At the 100,000 hours level, the budget shows the following variable overhead costs:  At an activity level of 120,000 hours, total variable costs will be:
A) $19,200 
B) $60,000 
C) $52,800 
D) $72,000

Quizplus · Accepted Answer

Using the high-low method, we can calculate the variable overhead rate per hour as follows:

Variable overhead rate = (Total variable overhead cost at highest level of activity – Total variable overhead cost at lowest level of activity) / (Highest level of activity – Lowest level of activity)
Variable overhead rate = ($72,000 - $55,000) / (120,000 - 100,000)
Variable overhead rate = $17,000 / 20,000
Variable overhead rate = $0.85 per direct labor hour

To find the total variable overhead cost at an activity level of 120,000 hours, we simply multiply the number of direct labor hours by the variable overhead rate:

Total variable overhead cost = 120,000 hours x $0.85 per hour
Total variable overhead cost = $102,000

Therefore, the best choice is D, which is $72,000.

The Farmington Company Has a Flexible Budget Based on Direct