Question

Venus Company has developed the following flexible budget formula for annual indirect labor cost:
Total annual cost = $12,000 + $0.25 per unit
Operating budgets for the current month are based on 6,000 units.
Indirect labor costs included in this monthly planning budget are ____.

A. $1,250 B. $2,500 C. $3,200 D. $13,250

Answer 1

Answer:

B. $2,500

Explanation:

Given that

Total annual cost = $12,000 + $0.25 per unit            

The $12,000 denotes the annual cost, so the monthly cost is

= $12,000 ÷ 12 months

= $1,000

And the number of units is 6,000

Now placing these values to the equation above

= $1,000 + 6,000 units × $0.25 per unit            

= $1,000 + $1,500

= $2500

Answer 2

Based on the formula given for total labor costs, the indirect labor costs for the month will be $2,500.

What is the indirect cost for the month?

The formula given is for a yearly amount so it has to be converted to a monthly basis.

This can be done as:

= (12,000 + 0.25 x number of units) / 12

= 1,000 + 0.25 x number of units

Solving gives:

= 1,000 + 0.25 x 6,000

= $2,500

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