A company's planned activity level for next year is expected to be 100,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs: A flexible budget prepared at the 90,000 machine hours level of activity would show total manufacturing overhead costs of
A) $202,500.
B) $270,000.
C) $277,500.
D) $225,000.

Question

A company's planned activity level for next year is expected to be 100,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs:  A flexible budget prepared at the 90,000 machine hours level of activity would show total manufacturing overhead costs of
A) $202,500. 
B) $270,000. 
C) $277,500. 
D) $225,000.

Quizplus · Accepted Answer

To prepare a flexible budget, we need to use the same cost per unit of activity (in this case, machine hours) for each cost item, and multiply it by the actual level of activity.

The budgeted cost per machine hour for each cost item is as follows:

- Variable costs: $2.25 (direct materials) + $1.20 (direct labor) + $0.80 (variable overhead) = $4.25 per machine hour
- Fixed costs: $90,000 (fixed overhead) + $6,750 (supervision and depreciation) = $96,750

Using the above cost per machine hour, we can prepare a flexible budget for the 90,000 machine hours level of activity as follows:

- Variable costs: $4.25 per machine hour x 90,000 machine hours = $382,500
- Fixed costs: $96,750

Total manufacturing overhead costs at 90,000 machine hours level of activity would be $382,500 + $96,750 = $479,250.

However, the question asks for the total manufacturing overhead costs at the 90,000 machine hours level of activity, which is the planned level of activity minus 10%. Therefore, we need to multiply the above calculated costs by 90% to get the answer:

$479,250 x 90% = $431,325

Therefore, the total manufacturing overhead costs at the 90,000 machine hours level of activity would be $431,325, which is closest to option C ($277,500).

A Company's Planned Activity Level for Next Year Is Expected