Question

15.

Skelton Corporation had planned to produce 50,000 units of product during the first quarter of the current year. The company prepared the following budget on May 1:

	Budgeted (50,000 units)
Variable costs:
Direct materials used	$	36,000
Direct labor		45,000
Variable overhead		22,500
Fixed costs:
Manufacturing overhead		58,500
Total manufacturing costs	$	162,000

During the first quarter, Skelton produced 60,000 units and incurred total manufacturing costs of $184,000.

Which of the following amounts should not be included in Skelton's flexible budget at a 60,000-unit level?

Group of answer choices

Direct materials used, $43,200

Fixed manufacturing overhead, $70,200

Direct labor, $54,000

Variable overhead, $27,000

Answer 1

Fixed manufacturing overhead at 50,000 units = $58,500

When output is increased to 60,000 units, Fixed manufacturing overhead will not increase. It will remain at the same level of $58,500. It happens because fixed costs do not change with the change in the level of output within the relevant range.

Hence, Fixed manufacturing overhead $70,200 should not be included in Skelton's flexible budget at a 60,000-unit level.

Second option is the correct option.

Variable costs like Direct materials used, Direct labor and Variable overhead will increase in direct proportion to output.