Earth,Inc,is Developing Flexible Budgets for Each Department as Part of Its

question 21

Essay

Earth,Inc.,is developing flexible budgets for each department as part of its plan to use standard costs.Normal monthly volume in the Sifting Department is 50,000 direct labor hours.At normal volume,department fixed costs include $70,000 for power and $40,000 for maintenance,and salaries of $70,000 per month.Indirect variable labor is $120,000,which involves 15,000 hours of indirect labor at $8 per hour.Other variable costs in the Sifting Department are as follows:
$$\begin{array} { | l r | } \hline \text { Tools and supplies } & \$ 3.00 \text { per machine hour } \\\text { Maintenance } & 2.50 \text { per machine hour } \\\text { Power } & 3.50 \text { per machine hour } \\\text { Depreciation } & 4.50 \text { per machine hour } \\\hline\end{array}$$
Normal volume is 40,000 machine hours per month.The company uses a service (or usage)hours method to depreciate its fixed assets.
a. Prepare a departmental flexible overhead budget for 30,000 machine hours and for 40,000 machine hours.
b. Did you treat depreciation expense as a variable or a fixed cost? Defend your approach.

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Definitions:

Operating Efficiency

A measure of how well a company uses its resources to generate profits, indicating the effectiveness of management strategies.

Productive Life

Refers to the period of time over which an asset is expected to be useful to the owning entity in generating revenue or income.

Plant Asset

Long-term tangible assets used in the production of goods and services, such as buildings, machinery, and equipment.

Plant Assets

Fixed, tangible assets used in the operation of a business, such as machinery, buildings, and equipment, that have a useful life of more than one year.