Johnny Lee Inc. produces a line of small gasoline-powered engines that can be used in a variety of residential machines, ranging from different types of lawnmowers, to snowblowers, to garden tools (such as tillers and weed-whackers). The basic product line consists of three different models, each meant to fill the needs of a different market. Assume you are the cost accountant for this company and that you have been asked by the owner of the company to construct a flexible budget for factory overhead costs, which seem to be growing faster than revenues. Currently, the company uses machine hours (MHs) as the basis for assigning both variable and fixed factory overhead costs to products. Within the relevant range of output, you determine that the following factory fixed overhead costs per month should occur: engineering support, $15,800; insurance on the manufacturing facility, $5,800; property taxes on the manufacturing facility, $12,800; depreciation on manufacturing equipment, $14,600; and indirect labor costs of supervisory salaries, $15,600, setup labor, $3,200, and materials handling, $3,300. Variable factory overhead costs are budgeted at $61.00 per machine hour, as follows: electricity, $16.00; indirect materials for Material A of $9.00 and for Material B of $12.00; indirect labor—maintenance, $14.00; and production-related supplies, $10.00. Required: 1. Prepare a flexible budget for Johnny Lee for each of the following monthly levels of machine hours: (a) 4,800, (b) 5,800, and (c) 6,800. 2. Generate an equation to represent, within the relevant range, the factory overhead costs per month for Johnny Lee. Use this equation to estimate monthly total overhead cost for machine hours of 3,800 to 6,800, in increments of 500.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Johnny Lee Inc. produces a line of small gasoline-powered engines that can be used in a variety of residential machines, ranging from different types of lawnmowers, to snowblowers, to garden tools (such as tillers and weed-whackers). The basic product line consists of three different models, each meant to fill the needs of a different market. Assume you are the cost accountant for this company and that you have been asked by the owner of the company to construct a flexible budget for
Within the relevant range of output, you determine that the following factory fixed overhead costs per month should occur: engineering support, $15,800; insurance on the manufacturing facility, $5,800; property taxes on the manufacturing facility, $12,800; depreciation on manufacturing equipment, $14,600; and indirect labor costs of supervisory salaries, $15,600, setup labor, $3,200, and materials handling, $3,300. Variable factory overhead costs are budgeted at $61.00 per machine hour, as follows: electricity, $16.00; indirect materials for Material A of $9.00 and for Material B of $12.00; indirect labor—maintenance, $14.00; and production-related supplies, $10.00.
Required:
1. Prepare a flexible budget for Johnny Lee for each of the following monthly levels of machine hours: (a) 4,800, (b) 5,800, and (c) 6,800.
2. Generate an equation to represent, within the relevant range, the factory overhead costs per month for Johnny Lee. Use this equation to estimate monthly total overhead cost for machine hours of 3,800 to 6,800, in increments of 500.
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