Battle Creek Storage Systems budgeted the following factory overhead costs for the upcoming year to help calculate variable and fixed predetermined overhead rates.

Indirect material: $2.50 per unit produced

Indirect labor: $3.00 per unit produced

Factory utilities: $3,000 plus $0.02 per unit produced

Factory machine maintenance: $10,000 plus $0.50 per unit produced

Material handling charges: $8,000 plus $0.12 per unit produced

Machine depreciation: $0.03 per unit produced

Building rent: $12,000

Supervisors’ salaries: $72,000

Factory insurance: $6,000

The company produces only one type of product that has a theoretical capacity of 100,000 units of production during the year. Practical capacity is 80 percent of theoretical, and normal capacity is 90 percent of practical. The company’s expected production for the upcoming year is 70,000 units.

a. Prepare a flexible budget for the company using each level of capacity.

b. Calculate the predetermined variable and fixed overhead rates for each capacity measure (round to the nearest cent when necessary).

c. The company decides to apply overhead to products using expected capacity as the budgeted level of activity. The firm actually produces 70,000 units during the year. All actual costs are as budgeted.

1. Prepare journal entries to record the incurrence of actual overhead costs and to apply overhead to production. Assume cash is paid for costs when appropriate.

2. What is the amount of underapplied or overapplied fixed overhead at yearend?

d. Which measure of capacity would be of most benefit to management and why?