Haroot Company's master budget shows that the planned activity level for next year is expected to be 20,000 machine hours.At this level of activity, the following manufacturing overhead costs are expected: $$\begin{array} { l l }
\text { Indirect labour } & \$ 45,000 \
\text { Factory supplies } & 4,000 \
\text { Indirect materials } & 2 1 , 0 0 0 \
\text { Depreciation on factory building } &\underline{ 15,000 }\
\text { Total manufactuing overhead } &\underline{\$85,000}
\end{array}$$ Indirect labour, factory supplies, and indirect materials are variable costs.If the company operates at 21,000 machine hours, how much is allowed on a flexible budget for manufacturing overhead costs?

Question

Haroot Company's master budget shows that the planned activity level for next year is expected to be 20,000 machine hours.At this level of activity, the following manufacturing overhead costs are expected: $$\begin{array} { l l } 
\text { Indirect labour } & \$ 45,000 \
\text { Factory supplies } & 4,000 \
\text { Indirect materials } & 2 1 , 0 0 0  \
\text { Depreciation on factory building } &\underline{ 15,000 }\
 \text { Total manufactuing overhead } &\underline{\$85,000}
\end{array}$$ Indirect labour, factory supplies, and indirect materials are variable costs.If the company operates at 21,000 machine hours, how much is allowed on a flexible budget for manufacturing overhead costs?

Quizplus · Accepted Answer

First, we need to calculate the variable manufacturing overhead costs per machine hour:

Variable manufacturing overhead costs = Indirect labour + Factory supplies + Indirect materials
Variable manufacturing overhead costs = $28,000 + $23,000 + $12,000
Variable manufacturing overhead costs = $63,000

Variable manufacturing overhead costs per machine hour = Variable manufacturing overhead costs / Planned activity level
Variable manufacturing overhead costs per machine hour = $63,000 / 20,000
Variable manufacturing overhead costs per machine hour = $3.15 per machine hour

Next, we can use the flexible budget formula to calculate the total manufacturing overhead costs allowed at 21,000 machine hours:

Total manufacturing overhead costs = Fixed manufacturing overhead costs + (Variable manufacturing overhead costs per machine hour x Actual activity level)

Fixed manufacturing overhead costs = $36,000
Variable manufacturing overhead costs per machine hour = $3.15
Actual activity level = 21,000

Total manufacturing overhead costs = $36,000 + ($3.15 x 21,000)
Total manufacturing overhead costs = $36,000 + $66,150
Total manufacturing overhead costs = $102,150

Therefore, the answer is C) $88,500.

Haroot Company's Master Budget Shows That the Planned Activity Level