A Company estimated its overhead to produce 80,000 units at Php 1,000,000.00 (60% is variable). If the estimate changes and that company now expects to produce 100,000 units, what would be the budgeted overhead be if the cost behavior remains the same?

10 points - solution

2 points - correct choice

Select one:

a. 1,150,000

b. 1,050,000

c. 1,450,000

d. 1,250,000

Solution:

At 80000 units of production the overhead is Php 1000000.00

Here 60% is variable, therefore 40% fixed (100% - 60%)

Hence, Fixed overhead is Php1000000. 00 * 40% = Php 400000.00

and, Variable overhead is Php 1000000.00 * 60% = Php 600000.00

Now company expects to produce 100000 units increased by 20000 units with same cost behavior (i.e.,60% variable).Then Budgeted Overhead will be -

For fixed overhead there will be no change, it remain same as for 80000 units because fixed overhead cost are cost that do not change even while volume of production activity is increasing or decreasing.Hence it remain as i.e., Php 400000.00

Variable overhead cost are costs that change as the volume of production changes. However, cost per unit of variable overhead doesnot change.

Variable overhead for 100000 units is -

= (Variable overhead in 80000 units ÷ 80000 units) * 100000 units

= (Php 600000.00 ÷ 80000 units) * 100000 units

= Php 750000

Or, Cost per unit of Variable overhead = Php 600000 / 80000 units = Php 7.5

For 1 unit of production variable overhead is Php 7.5

Therefore, for 100000 units of production Variable overhead will be = Php 7.5 * 100000 units = Php 750000

Hence Total overhead for 100000 units is Fixed overhead + Variable overhead

= Php 400000 + Php 750000

= Php 1150000

Budgeted Overhead is Php 1150000.

Hence, the correct option is option a. 1150000.