In addition to the above costs, the management accountant estimates that for each increment of 50,000 units produced, one supervisor will need to be employed. A supervisor’s annual salary is $35,000.
Assuming the budgeted figures are correct, what would the flexed total production cost be if production is 80% of maximum capacity?
Solution
An 80% activity level is 210,000 units.
Material and labour are both variable costs. Material is $4 per unit and labour is $5.50 per unit, so total variable cost per unit is $9.50
Total variable costs = $9.50 x 210,000 units = $1,995,000
Fixed costs = $750,000
Supervision = $175,000 as five supervisors are required for a production level of 210,000 units.
Total annual budgeted cost allowance = $1,995,000 + $ 750,000 + $ 175,000 = $2,920,000
Part 2
The management accountant has said that a machine maintenance cost was not included in the flexible budget but needs to be taken into account.
The new battery will be manufactured on a machine currently owned by Corfe Co which was previously used for a product which has now been discontinued. The management accountant estimates that every 1,000 units will take 14 hours to produce. The annual machine hours and maintenance costs for the machine for the last four years have been as follows: