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Question:
Timothy Ltd uses a flexible budget for overhead costs. The company expects to produce 40,000 units of the product it manufactures. Each unit requires 0.40 direct labour hours. The cost formulas for each of the four overhead items (where X is measured in direct labour hours) are as follows:
Cost item:
Cost formula
Power
0.40X
Maintenance
$15,000 + 0.60X
Indirect labour
$18,000 + 2.50X
Rent
$20,000
(A) What are the flexible budget formulae for Willoughby Ltd?
(B) Prepare an overheads budget for the expected activity level for the coming year. Show each expense item separately with subtotals for variable and fixed overhead.
(C) Prepare an overheads budget that reflects production that is 25% lower than expected.
(D) In what way are flexible budgets different from static budgets? Why are flexible budgets better than static budgets for assessing performance?
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