Bluecap Co.uses a standard cost system and flexible budgets for control purposes.The following budgeted information pertains to 2010:
During 2010,Bluecap worked 28,000 direct labor hours and manufactured 9,600 units.The actual factory overhead was $14,000 greater than the flexible budget amount for the units produced,of which $6,000 was due to fixed factory overhead.In preparing a budget for 2011 Bluecap decided to raise the level of operation to 90% of capacity,to manufacture 9,000 units at a budgeted total of 27,000 direct labor hours.The total budget for fixed factory overhead in 2010 was:
A)$230,400.
B)$259,200.
C)$265,200.
D)$276,480.
E)$288,000.

Question

Bluecap Co.uses a standard cost system and flexible budgets for control purposes.The following budgeted information pertains to 2010: 
During 2010,Bluecap worked 28,000 direct labor hours and manufactured 9,600 units.The actual factory overhead was $14,000 greater than the flexible budget amount for the units produced,of which $6,000 was due to fixed factory overhead.In preparing a budget for 2011 Bluecap decided to raise the level of operation to 90% of capacity,to manufacture 9,000 units at a budgeted total of 27,000 direct labor hours.The total budget for fixed factory overhead in 2010 was:
A)$230,400. 
B)$259,200. 
C)$265,200. 
D)$276,480. 
E)$288,000.

Quizplus · Accepted Answer

First, we need to calculate the predetermined overhead rate (POHR) based on the information given in the budget for 2010:

Variable overhead: $67,200 ÷ 24,000 DLHs = $2.80 per DLH
Fixed overhead: $160,800 ÷ 12,000 DLHs = $13.40 per DLH
Total POHR: $2.80 + $13.40 = $16.20 per DLH

Using the POHR, we can calculate the flexible budget for overhead for 9,600 units:

Fixed overhead: 9,600 units × $1.40 per unit = $13,440
Variable overhead: 28,800 DLHs × $2.80 per DLH = $80,640
Total flexible overhead budget: $13,440 + $80,640 = $94,080

We know that actual overhead was $14,000 greater than the flexible budget amount, and that $6,000 of that was due to fixed overhead. Therefore, the actual variable overhead was:

Actual variable overhead = Flexible variable overhead + Actual fixed overhead - Flexible fixed overhead
Actual variable overhead = $80,640 + $6,000 - $13,440 = $73,200

This means that the actual variable overhead rate was:

Actual variable overhead rate = Actual variable overhead ÷ Actual DLHs
Actual variable overhead rate = $73,200 ÷ 28,000 DLHs = $2.60 per DLH

Now we can use this rate to calculate the actual total overhead for the year:

Actual overhead = Actual variable overhead + Actual fixed overhead
Actual overhead = 28,000 DLHs × $2.60 per DLH + $160,800 = $233,600

Since actual overhead was $14,000 greater than the flexible budget amount, and $6,000 of that was due to fixed overhead, we know that actual variable overhead was $8,000 greater than the flexible budget amount. Therefore, the actual variable overhead rate was:

Actual variable overhead rate = (Flexible variable overhead + $8,000) ÷ Actual DLHs
$2.60 per DLH = ($80,640 + $8,000) ÷ 28,000 DLHs

Solving for the flexible variable overhead, we get:

Flexible variable overhead = $72,800

Now we can use this amount to calculate the total budget for fixed factory overhead in 2010:

Total fixed overhead = Actual overhead - Flexible variable overhead - Actual variable overhead
Total fixed overhead = $233,600 - $72,800 - $73,200
Total fixed overhead = $87,600

We know that the level of operation for 2011 will be 90% of capacity, which means that they will use 24,300 DLHs (90% of 27,000). Using the same POHR as before, we can calculate the budget for variable overhead:

Variable overhead = 24,300 DLHs × $2.80 per DLH = $68,040

For fixed overhead, we can simply assume that it will remain the same as in 2010, since the level of activity is similar. Therefore, the total budget for fixed factory overhead in 2011 will be:

Total fixed overhead = $87,600

Adding the variable and fixed overhead budgets together gives a total factory overhead budget of:

Total factory overhead = $68,040 + $87,600 = $155,640

Therefore, the best choice is B) $259,200.