E21-3 Thome company uses a flexiable budget for manufacturing overhead based on

Question

E21-3 Thome company uses a flexiable budget for manufacturing overhead based on direct labor hours. Variable manufacturing overhead costs per direct labor hours are as follow:

Indirect labor $1.50; Indirect materials .50; Utilities .40

Fixed overhead costs per month are : Supervision $4000, Depreciation $1,500 and Property taxes $800. The company believes it will normally operate in a range of 7,000-10,000 direct labor hours per month.

1. Using the information in E21-3, assume that in July 2012, Thome Company incurs the following manufacturing overhead costs.

Variable costs: Indirect labor: $8,700; Indirect Materials: $4,300; Utilities: $3,200

Fixed costs: Supervision: $4,000; Depreciation: $1,500 Property Taxes: $800

(a) Prepare a flexiable budget performance report, assuming that the company worked 9,000 direct labor hours during the month.

(b) Prepare a flexiable budget performance report, assuimng that the company worked 8,500 direct labor hours during the month.

(c) comment on your findings

Explanation / Answer

a) Flexible budget for 9000 hours

Indirect Labour: $13500

Indirect Materials: $4500

Utilities: $3600

Fixed costs remain the same.

b) Flexible budget for 8500 hours:

Indirect Labour: $12750

Indirect materials: $4250

Utilities: $3400

c) The company gets a good flexible discount on Indirect Labour but not on Indirect Materials or Utilites.

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