Question

(b) The budgeted level of output for a manufacturing department is 18,000 hours per period and it is

desired to produce a flexible budget for its factory overhead. The rate of pay for direct labour NI
per hour. The following is available:
Variable Cost: indirect labour per direct labour hour
Consumable supplies
Holiday and sick pay
Power
Fixed Cost: Rent rate per period
1
2
3
4
№6,000
N3,500
N2,000
Supervision for the period.
№4,000
Semi Variable Cost- For this purpose, these costs may be regarded as partly fixed and partly
variable. The previous 4 months costs compared with direct labour hours worked were as
follows:
Month
Depreciation per period
Head office charges
Direct Labour Hours
N
17,600
16,400
17,000
18,800
NI
10k
5% of direct labour
25k
13,200
12,600
12,900
13,800
Semi Variable Cost
You are required to:
(i)
Prepare the flexible budget for the department at 80%, 90%, 100% and 110% of the
budgeted level of output.
(ii)
Calculate the total overhead rate per direct labour hour that would absorb the budgeted
cost of the department. Divide the rate into its variable and fixed components.
(10 Marks)

Answer 1

(i) To prepare the flexible budget for the department at different levels of output, we need to first calculate the total variable cost and the total fixed cost for the budgeted level of output of 18,000 direct labour hours.

Variable Cost:

Indirect Labour = N1,000 x 18,000 = N18,000,000

Consumable Supplies = N3,500 x 18,000 = N63,000,000

Holiday and Sick Pay = N2,000 x 18,000 = N36,000,000

Power = N6,000 x 18,000 = N108,000,000

Semi-Variable Cost:

Variable Cost = (N13,800 – N12,600) / (18,800 – 17,000) = N60 per direct labour hour

Fixed Cost = N12,600 – (17,000 x N60 / direct labour hour) = N3,600,000

Total Variable Cost = N225 per direct labour hour (N18,000,000 + N63,000,000 + N36,000,000 + N108,000,000 + (N60 x direct labour hours))

Total Fixed Cost = N3,600,000

Now, we can use these costs to prepare the flexible budget for different levels of output:

Flexible Budget for Department

[ Photo inserted ]

| Level of Output | Direct Labour Hours | Total Variable Cost | Total Fixed Cost | Total Cost |

|----------------|---------------------|---------------------|------------------|------------|

| 80% | 14,400 | N1,800,000 | N3,600,000 | N5,400,000 |

| 90% | 16,200 | N2,025,000 | N3,600,000 | N5,625,000 |

| 100% | 18,000 | N2,250,000 | N3,600,000 | N5,850,000 |

| 110% | 19,800 | N2,475,000 | N3,600,000 | N6,075,000 |

(ii) To calculate the total overhead rate per direct labour hour, we need to divide the total cost by the total direct labour hours. For the budgeted level of output of 18,000 direct labour hours:

Total Cost = N5,850,000

Total Direct Labour Hours = 18,000

Total Overhead Rate = N325 per direct labour hour (N5,850,000 / 18,000)

To divide the rate into its variable and fixed components, we need to subtract the fixed cost from the total overhead rate:

Variable Cost = N225 per direct labour hour (total variable cost / total direct labour hours)

Fixed Cost = N100 per direct labour hour (N325 - N225)

Step-by-step explanation: