Megan, Inc. uses the following standard costs per unit for one of its products: Direct labor (2.0 hrs. @ $5.00/hr.) = $10.00; overhead (2.0 hrs. @ $2.50/hr.) = $5.00. The flexible budget for overhead is $120,000 plus $1.00 per direct labor hour (DLH). Actual data for the past month show total overhead costs of $225,000, total fixed overhead of $123,000, 85,000 hours worked, and 40,000 units produced.

What is the budgeted denominator activity level for Megan, Inc., in direct labor hours (DLHs), to the nearest whole number?
A) 24,000.
B) 48,000.
C) 60,000.
D) 80,000.
E) 100,000.

Question

Megan, Inc. uses the following standard costs per unit for one of its products: Direct labor (2.0 hrs. @ $5.00/hr.) = $10.00; overhead (2.0 hrs. @ $2.50/hr.) = $5.00. The flexible budget for overhead is $120,000 plus $1.00 per direct labor hour (DLH) . Actual data for the past month show total overhead costs of $225,000, total fixed overhead of $123,000, 85,000 hours worked, and 40,000 units produced.

What is the budgeted denominator activity level for Megan, Inc., in direct labor hours (DLHs) , to the nearest whole number?

What is the budgeted denominator activity level for Megan, Inc., in direct labor hours (DLHs), to the nearest whole number?
A) 24,000.
B) 48,000.
C) 60,000.
D) 80,000.
E) 100,000.

Quizplus · Accepted Answer

The budgeted denominator activity level can be calculated from the flexible budget formula for overhead, which is $120,000 plus $1.00 per DLH. Given that the total fixed overhead is $123,000, we can infer that the fixed portion of the budget is $120,000. The variable portion is $1.00 per DLH. To find the budgeted activity level, we need to set the total budget equal to the fixed plus variable costs ($120,000 + $1.00 per DLH) and solve for the DLHs that would justify the fixed overhead of $123,000. However, the fixed overhead information is a red herring for calculating the denominator activity level. The correct approach is to use the given information about the flexible budget and the standard cost per unit to determine the budgeted activity level. The standard cost per unit includes 2.0 DLHs at $5.00/hr. Since the flexible budget includes $1.00 per DLH for variable overhead, and the fixed overhead is given as $120,000, we need to find the level of activity (DLHs) that would be used to calculate this budget. Given that the total overhead costs were $225,000 and the total fixed overhead was $123,000, we focus on the structure of the flexible budget to find the denominator activity level. The question, however, is asking for the budgeted denominator activity level, not how to reconcile actual overhead with budgeted overhead.The budgeted denominator activity level is typically based on expected or standard usage. With 2.0 DLHs per unit and the information provided does not directly lead to solving for the budgeted activity level without making assumptions about how the fixed overhead relates to the total budgeted overhead costs.Given the lack of direct information to calculate the denominator activity level based on the fixed overhead and variable rate provided, and considering the standard costs and actual data provided, the correct answer involves understanding the budgeting process and the role of standard costs in setting budgeted activity levels. However, without a clear path from the information given to calculate the exact budgeted denominator activity level based on fixed and variable overhead components, we look at the standard labor hours per unit and production to estimate the budgeted activity level. With 2.0 hours per unit and no direct link to the fixed overhead to calculate the denominator, the answer selection might have been approached differently by considering the standard cost structure and its implications on budgeting activity levels. Given the complexity and the potential misunderstanding in the calculation process, the correct answer is intended to reflect an understanding of budgeted activity levels in relation to standard costing and budgeting practices, but the provided information leads to a calculation challenge that doesn't directly resolve to a clear answer without additional assumptions.