Presented below are the monthly factory overhead cost budget (at normal capacity of 5,000 units or 20,000 direct labor hours) and the production and cost data for a month. The predetermined overhead rate is based on normal capacity.

Required:
1. Assuming that variable costs will vary in direct proportion to the change in volume, prepare a flexible budget for production levels of 80%, 90%, and 110% of normal capacity. Also determine the rate for application of factory overhead to work in process at each level of volume in both units and direct labor hours.
2. Prepare a flexible budget for production levels of 80%, 90%, and 110%, assuming that variable costs will vary in direct proportion to the change in volume, but with the following exceptions.
a. At 110% of capacity, an assistant department head will be needed at a salary of $10,500 annually.
b. At 80% of capacity, the repairs expense will drop to onehalf of the amount at 100% capacity. (At other levels it is perfectly variable.)
c. Maintenance supplies expense will remain constant at all levels of production.
d. At 80% of capacity, one part-time maintenance worker, earning $6,000 a year, will be laid off.
e. At 110% of capacity, a machine not normally in use and on which no depreciation is normally recorded will be used in production. Its cost was $12,000, it has a ten-year life, and straight-line depreciation will betaken.

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Factory Overhead Cost Budget Fixed cost: Depreciation on building and machinery ...$1,200 500 500 1,500 2,300 1,000 Taxes on building and machinery Insurance on building and machinery $7,000 Maintenance wages Variable cost: Other supplies Payroll taxes.. Small tools... $ 400 300 200 800 300 .. 2,000 Total standard factory overhead $9,000