Olsen Company has implemented an activity-based accounting system and now has decided to begin activity-based budgeting. For the inspection activity, an inspector, working 2,000 hours per year, is paid a salary of $50,000. The products are produced in batch sizes of 1,000. A sample of each batch is taken and the products in the sample are run through a series of electronic tests. On average, each batch sample requires 100 hours for testing. The testing equipment is leased at $10,000 per year and has 5,000 hours of testing capability per year. Power and other materials for the test costs $2.00 per hour.
Required
1. Suppose that Olsen budgets 50,000 units for production for the coming year. What is the budget for the inspection activity?
2. Now assume that the budget is 60,000 units. Prepare a budget for inspection for this level of activity.
3. Prepare a flexible budget formula, assuming that production is usually between 60,000 and 80,000 units. Is the flexible budget formula valid only for this range of activity? Explain.