Allsorts Insurance Company uses a flexible overhead budget for its new policy de

Question

Allsorts Insurance Company uses a flexible overhead budget for its new policy department. The firm offers five types of policy, with the following standard hours allowed per policy for clerical processing Health Life Automobile Renter 1.5 hour 2.0 hours 2.5 hours 2.5 hours 5.5 hours The following numbers of insurance applications were processed during July: Health Life Automobile Renter 400 325 175 625 325 The accountant estimates that the variable overhead rate in the application processing department is $15 per hour, and that fixed overhead costs will amount to $6,500 per month Required 1. Calculate the number of standard clerical hours allowed in July, given the number of applications processed 2. Explain why the company's flexible budget should be based on the number of clerical hours allowed rather than on the number of applications processed 3. Construct a formula flexible overhead budget for the company 4. Calculate the flexible budget for total overhead cost in July

Explanation / Answer

Answer 1

Answer 2

The company's flexible budget should be based on the number of clerical hours allowed rather than on number of applications processed.because

"Basing the fexible budget on the number of applications would give a misleading estimate of overhead costs beacuse differenent type of applications require different amount if clerical time."

Budgeted Variable Overhead = 5037.50 * 15 = 75,562.50

Budgeted Fixed Overhead = 6,500

Policy Type Standard Time per policy (Hr) Application Processed Total Standard Hrs allowed Health 1.5 400.0 600.0 Life 2.0 325.0 650.0 Automobile 2.5 175.0 437.5 Rental 2.5 625.0 1,562.5 Homeowner 5.5 325.0 1,787.5 Total 5,037.5

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