Question

Life Problem 11-36 Gibralter Insurance Company uses a flexible overhead budget for its application processing department. The firm offers five types of policies, with the following standard hours allowed for clerical processing. Flexible Budget, Mul- Standard Hours Allowed Automobile 1 hour tiple Products, Insurance Renter's 1 hour Company Homeowner's 2 hours (LO 11-1, 11-2, 11-4) Health 2 hours 4. Budgeted overhead cost 5 hours for July $11,800 The following numbers of insurance applications were processed during July. Automobile 250 Renter's 200 100 400 200 The controller estimates that the variable-overhead rate in the application processing department is $4.00 per clerical hour, and that fixed-overhead costs will amount to $2,000 per month Required: 1. How many standard clerical hours are allowed in July, given actual application activity? 2. Why would it not be sensible to base the company's flexible budget on the number of applications processed instead of the number of clerical hours allowed? 3. Construct a formula flexible overhead budget for the company. 4. What is the flexible budget for total overhead cost in July? Homeowner's Health Life

Please show all calculations.

Answer 1

Answer:-

1.

	Policy Type	Standard Hours per Application	Actual Activity	Standard Hours Allowed
	Automobile........................................	1	250	250
	Renter's .............................................	1	200	200
	Homeowner's ....................................	2	100	200
	Health................................................	2	400	800
	Life....................................................	5	200	1,000
	Total..................................................			2,450

2. The different types of applications require different amounts of clerical time, and variable overhead cost is related to the use of clerical time. Therefore, basing the flexible budget on the number of applications would give a misleading estimate of overhead costs. For example, processing 100 life insurance applications will entail much more overhead cost than processing 100 automobile insurance applications.

3. Formula flexible budget:

Total budgeted monthly overhead cost budgeted variable total overheadcost per x clerical clericalhour hours budgeted fixed overhead cost per month
Total budgeted monthly overhead cost = ($4.00 × X) + $2,000 where X denotes total clerical time in hours.

4.

Budgeted overhead cost for July	=	($4.00 × 2,450) + $2,000
	=	$11,800