Question

1. Soul Socket Inc. manufactures socket wrenches.

-For next month, the vice president of production plans on producing 4,450 wrenches per day.

-The company can produce as many as 5,000 wrenches per day, but is more likely to produce 4,500 per day.

-The demand for wrenches for the next three years is expected to average 4,250 wrenches per day.

-Fixed manufacturing costs per month total $374,000.

-The company works 22 days a month.

-Fixed manufacturing overhead is charged on a per-wrench basis.

Required: Answer a. – d. below

a. What is the theoretical fixed manufacturing overhead rate per wrench for the next month?

b. What is the practical fixed manufacturing overhead rate per wrench for the next month?

c. What is the normal fixed manufacturing overhead rate per wrench for the next month?

d. What is the master-budget fixed manufacturing overhead rate per wrench for the next month?

Answer 1

Answer:

a. $3.40 per wrench

b. $3.78 per wrench

c. $4 per wrench

d. $3.82 per wrench

Explanation:

a) Theoretical Fixed Manufacturing Overhead.

This is the cost associated with what the company can produce.

They can produce as much as 5,000 wrenches per day for 22 days on a budget of $374,000.

Theoretical Manufacturing Overhead is therefore,

= 374,000 / ( 5,000 * 22)

= $3.40 per wrench.

b. The Practical Fixed Overhead would be the costs to be incurred with the more likely level of production.

Company will more likely produce 4,500 wrenches a day.

Following from a,

= 374,000 / (4,500 * 22)

= 3.7778

= $3.78 per wrench.

c. The normal overhead is the cost associated when the company produces according to demand.

The demand is expected to be 4,250 wrenches for the next 3 years.

Therefore,

= 374,000 ( 4,250 * 22)

= $4 per wrench.

d. The master budget overhead rate is cost associated with the level the company Plans to produce.

Soul Socket plans to produce 4,450 wrenches a day.

Therefore,

= 374,000 (4,450 * 22)

= $3.82 per wrench.