Battle Creek Storage Systems budgeted the following factory overhead costs for t

Question

Battle Creek Storage Systems budgeted the following factory overhead costs for the upcoming year to help variable and fixed predetermined overhead rates.

Indirect material: $2.50 per unit produced

Indirect labor: $3.00 per unit produced

Factory utilities: $3,000 plus $0.02 per unit produced

Factory machine maintenance: $10,000 plus $.50 per unit produced

Material handling charges: $8,000 plus $0.12 per unit produced

Machine depreciation: $0.03 per unit produced

Building rent: $12,000

Supervisors

Explanation / Answer

Theoritical capacity Practical capacity Normal capacity Expected capacity Units produced (a) 100000 80000 72000 70000 Variable cost: Indirect materials 2.5 2.5 2.5 2.5 Indirect labor 3 3 3 3 Factory utilities 0.02 0.02 0.02 0.02 Factory maintenance 0.5 0.5 0.5 0.5 Material handling charges 0.12 0.12 0.12 0.12 Machine depreciation 0.03 0.03 0.03 0.03 Total variable cost per unit produced (b) 6.17 6.17 6.17 6.17 Total variable cost (a*b) 617000 493600 444240 431900 Fixed costs: Factory utilities 3000 3000 3000 3000 Factory maintenance 10000 10000 10000 10000 Material handling charges 8000 8000 8000 8000 Building rent 12000 12000 12000 12000 Supervisor's salary 72000 72000 72000 72000 Factory insurance 6000 6000 6000 6000 Total fixed cost ( c) 111000 111000 111000 111000 Fixed cost per unit (c/a)            1.11                1.39               1.54                 1.59 ( c) Overhead to be applied,when firm produces 70,000 units Variable overhead per unit 6.17 Fixed overhead per unit            1.59 Work in process A/c……….Dr       543,200      To Overhead A/c           543,200 70000 *(6.17+1.59) Overhead A/c…………Debit    To Accounts payable A/c Fixed Overhead applied = 70000 *1.59 111300 Fixed Overhead incurred 111000 Over applied 300 Practical capacity will be most beneficial as it will be able to earn more revenue by incurring the same fixed cost.Theoritical capacity is not recommended because it is not possible to work in this capacity due to public holidays, etc when one cannot work.

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