Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 42

Flexible Overhead Budgets for Control; Spreadsheet Application 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 manufacturing overhead costs, which seem to be growing faster than revenues. Currently, the company uses machine hours (MH) 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 fixed overhead costs per month should occur: engineering support, $15,000; insurance on the manufacturing facility, $5,000; property taxes on the manufacturing facility, $12,000; depreciation on manufacturing equipment, $13,800; indirect labor costs: supervisory salaries, $14,800; setup labor, $2,400; materials handling, $2,500. Variable overhead costs are budgeted at $21 per machine hour, as follows: electricity, $8; indirect materials: Material A = $1, Material B = $4; maintenance labor, $6; and manufacturing supplies, $2.
Required
1. Use an Excel spreadsheet to prepare a flexible budget for Johnny Lee, Inc., for each of the following monthly levels of machine hours: 4,000; 5,000; and 6,000. (Hint: Provide in the spreadsheet a separate line for each of the overhead costs for the company.)
2. Generate an equation to represent, within the relevant range, the manufacturing overhead costs per month for Johnny Lee, Inc.
3. Generate a graphical representation of the monthly overhead cost function (within the relevant range) for Johnny Lee, Inc.