FLEXIBLE BUDGETING At the beginning of last year, Jean Bingham, controller for Thorpe Inc., prepared the following budget for conversion costs at two levels of activity for the coming year:

Direct Labor Hours 100,000 120,000 Direct labor $1,000,000 $1,200,000 Supervision 180,000 180,000 Utilities 18,000 21,000 Depreciation 225,000 225,000 Supplies 25,000 30,000 Maintenance 240,000 284,000 Rent 120,000 120,000 Other 60,000 70,000 Total manufacturing cost $1,868,000 $2,130,000 During the year, the company worked a total of 112,000 direct labor hours and incurred the following actual costs:

Direct labor $963,200 Supervision 190,000 Utilities 20,500 Depreciation 225,000 Supplies 24,640 Maintenance 237,000 Rent 120,000 Other 60,500 Thorpe applied overhead on the basis of direct labor hours. Normal volume of 120,000 direct labor hours is the activity level to be used to compute the predetermined overhead rate.

Required:

. Determine the cost formula for each of Thorpe’s conversion costs. (Hint: Use the high-low method.)

. Prepare a performance report for Thorpe’s conversion costs for last year. Should any cost item be given special attention? Explain.

Problem