Flexing Budget

Ado Co Manufactures smartphones and has developed a new handset, the ‘H’. The maximum production capacity of Ado Co is 150,000 units of the new Handset. The company’s management accountant is currently preparing an annual flexible budget and has collected the following so far for the ‘H’:

Production units 100, 000 units 120,000 units 150,000 units

Material costs $700,000 $840,000 $1050,000

Labor Costs $750,000 $900,000 $1,125,000

Incremental fixed costs $60,000 $60,000 $ 60,000

A) Assuming the budget figures are correct, what would the flexed total production cost be if production is 90% of maximum capacity.

B) The mgt accountant has said that the factory’s smartphone quality control system carries a cost that was not included in the flexible budget , but should be. He estimates that every 1000 smartphone will take 5 hours to control, every quality control hour has a variable cost of $120 and fixed quality control costs amount to $250,000. What is the estimated quality control cost if production of the smartphones is 90% of maximum capacity?

Solution:

A) 90% of capacity = 90% * 150,000 = 135,000 units

Stepped Supervision costs = 135,000/15000 = 9 steps
material cost = 135,000 * $7 per unit = $945,000
Labor cost = 135,000 * $7.50 = $1,012,500
fixed cost = $60,000

Stepped costs = 9 steps * $42,000 per step = $378,000

Total flexed production cost = $2,395,500.

Sir, my questions from this solution is, how did they get the $42,000 per step and why do they bring into the calculation the supervision cost when it was not mentioned in the question apart from the incremental fixed cost mentioned?

They also divided the 135,000 united by 15,000 to get 9 steps so where is the 15,000 coming from?

Thank you in advance sir.