Concept explainers
Business Specialty, Inc., manufactures two staplers: small and regular. The standard quantities of direct labor and direct materials per unit for the year are as follows:
The standard price paid per pound of direct materials is $1.60. The standard rate for labor is $8.00.
The company expects to work 12,000 direct labor hours during the year; standard overhead rates are computed using this activity level. For every small stapler produced, the company produces two regular staplers.
Actual operating data for the year are as follows:
- a. Units produced: small staplers, 35,000; regular staplers, 70,000.
- b. Direct materials purchased and used: 56,000 pounds at $1.55—13,000 for the small stapler and 43,000 for the regular stapler. There were no beginning or ending direct materials inventories.
- c. Direct labor: 14,800 hours—3,600 hours for the small stapler and 11,200 hours for the regular stapler. Total cost of direct labor: $114,700.
- d. Variable overhead: $607,500.
- e. Fixed overhead: $350,000.
Required:
- 1. Prepare a
standard cost sheet showing the unit cost for each product. - 2. Compute the direct materials price and usage variances for each product. Prepare
journal entries to record direct materials activity. - 3. Compute the direct labor rate and efficiency variances for each product. Prepare journal entries to record direct labor activity.
- 4. Compute the variances for fixed and variable overhead. Prepare journal entries to record overhead activity. All variances are closed to Cost of Goods Sold.
- 5. Assume that you know only the total direct materials used for both products and the total direct labor hours used for both products. Can you compute the total direct materials and direct labor usage variances? Explain.
1.
Prepare a standard cost sheet and show the unit cost for each product.
Explanation of Solution
Standard Cost: An estimated cost which is used for delivering a product under normal condition and it determine the performance of the company is called standard cost. The standard cost is expected cost which can be taken to compare with the actual cost to measure the operating efficiency of the company.
Prepare a standard cost sheet and show the unit cost for each product:
Small staplers:
Particulars | Standard Price ($) | Standard Usage | Standard Cost ($) |
(a) | (b) | ||
Direct materials | 1.60 | 0.375 lb | 0.60 |
Direct labor | 8.00 | 0.100 hr | .80 |
Fixed overhead | 30.00 | 0.100 hr | 3.00 |
Variable overhead | 40.00 | 0.100hr | 4.00 |
Unit cost | $8.40 |
Table (1)
Regular staplers:
Particulars | Standard Price ($) | Standard Usage | Standard Cost ($) |
(a) | (b) | ||
Direct materials | 1.60 | 0.625 lb. | 1.00 |
Direct labor | 8.00 | 0.150 hr. | 1.20 |
Fixed overhead | 30.00 | 0.150 hr. | 4.50 |
Variable overhead | 40.00 | 0.150 hr. | 6.00 |
Unit cost | $12.70 |
Table (1)
Working note 1: Calculate the standard usage for direct materials:
For small staplers:
Working note 2: Calculate the standard usage for direct materials:
For regular staplers:
Therefore, the standard cost for small staplers and regular staplers are $8.40 and $12.70 respectively.
2.
Calculate the direct materials price variance and the direct materials usage variance and prepare journal entries to record direct material activity.
Explanation of Solution
Direct material price variance: The variation in between actual price and estimated price paid for materials multiplied by the actual quantity is called material price variance. It is used to determine difference in price paid for material the price that was supposed to be paid for material.
The following formula is used to calculate direct material price variance:
Direct material usage (efficiency) variance: It is a measure that determines the variation in between actual and standard quantity of input multiplied by the standard unit price is called material usage variance.
The following formula is used to calculate direct material usage variance:
Compute the direct materials price variance:
Compute the direct materials usage variance:
For small staplers:
For regular staplers:
Prepare journal entries to record direct material activity:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
Direct Materials | 89,600 | ||
Direct Materials Price variance | 2,800 | ||
Accounts Payable | 86,800 | ||
(To record the purchase of direct materials) | |||
Work in Process | 91,000 | ||
Direct Materials Usage Variance | 1,400 | ||
Direct Materials | 89,600 | ||
(To record the usage of direct materials) | |||
Direct Materials Price variance | 2,800 | ||
Direct Materials Usage Variance | 1,400 | ||
Cost of Goods Sold | 4,200 | ||
(To close the purchase and usage of direct materials) |
Table (2)
Therefore, the direct materials price variance and the usage variance is $200 F and $1,200 F respectively.
2.
Calculate the direct labor rate variance and labor efficiency variance and prepare journal entries to record direct material activity.
Explanation of Solution
Direct Labor Rate Variance: The direct labor rate variance is a measure to determine the variation in the estimated cost of the direct labor and the actual cost of the direct labor and is multiplied by the actual hours is called direct labor rate variance.
The following formula is used to calculate the direct labor rate variance:
Direct labor efficiency variance is a measure that determines the difference between the estimated labor hours and the actual labor hours used and is multiplied by the standard rate per hour is called material usage variance.
The following formula is used to calculate direct labor efficiency variance:
Calculate the direct labor rate variance:
Calculate the labor efficiency variance:
For small staplers:
Calculate the labor efficiency variance:
For regular staplers:
Prepare journal entries to record direct material activity:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
Work in Process | 112,000 | ||
Direct Labor Efficiency Variance | 6,400 | ||
Direct Labor Rate Variance | 3,700 | ||
Wages Payable | 114,700 | ||
(To record the use of direct labor) | |||
Cost of Goods Sold | 2,700 | ||
Direct Labor Rate Variance | 3,700 | ||
Direct Labor Efficiency Variance | 6,400 | ||
(To record the direct labor variances) |
Table (3)
Working note 3:
Calculate the amount of work-in process:
Therefore, the direct labor rat variance and the efficiency variance are $800 U and $5,600 U respectively.
3.
Calculate the fixed overhead spending and variable overhead and prepare journal entries to record overhead activity.
Explanation of Solution
Fixed overhead spending variance: It is the difference between actual fixed overhead and the budgeted fixed overhead.
Favorable variance occurs only when the fixed overhead is less than the budgeted overhead. Unfavorable variance occurs only when the fixed overhead is more than the budgeted overhead.
The following formula is used to calculate fixed overhead spending variance:
Fixed overhead volume variance: It is the difference between budgeted fixed overhead and the applied fixed overhead.
The following formula is used to calculate fixed overhead volume variance:
Calculate the fixed overhead spending variance:
Calculate the volume variance:
Step 1: Compute the applied fixed overhead.
Step 2: Compute the volume variance.
Working note 4: Calculate the standard fixed overhead rate:
Working note 5: Calculate the standard hours:
Overhead Variance: The overhead variance is the difference arising between the real overhead consumed in the production of a product, and the estimated overhead determined in the production of that product.
Spending variances: It arises when management pays an amount which is different from the standard price for purchasing an item. The variable overhead spending variance measures the total effect of differences in the actual variable overhead rate (AVOR) and the standard variable overhead rate (SVOR).
Efficiency variances: It arises when standard direct labor hours expected for actual production different from labor the actual direct labor hours used.
Variable overhead efficiency variance tells managers how much of the total variable manufacturing overhead variance is due to using more or fewer machine hours than anticipated for the actual volume of output.
Compute the variable overhead spending variance:
Step 1: Compute the budgeted variable overhead cost.
Step 2: Compute the variable overhead spending variance.
Compute the variable overhead efficiency variance:
Step 1: Compute the applied variable overhead.
Step 2: Compute the variable overhead efficiency variance.
Prepare journal entries to record overhead activity:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
Work in Process | 560,000 | ||
Variable Overhead Control | 560,000 | ||
(To close the overhead variances) | |||
Work in Process | 420,000 | ||
Fixed Overhead Control | 420,000 | ||
(To close the overhead variances) | |||
Variable Overhead Control | 607,500 | ||
Miscellaneous Accounts | 607,500 | ||
(To record incurrence of actual overhead) | |||
Fixed Overhead Control | 350,000 | ||
Miscellaneous Accounts | 350,000 | ||
(To record incurrence of actual overhead) | |||
Fixed Overhead Control | 70,000 | ||
Variable Overhead Spending Variance | 15,500 | ||
Variable Overhead Efficiency Variance | 32,000 | ||
Fixed Overhead Spending Variance | 10,000 | ||
Fixed Overhead Volume Variance | 60,000 | ||
Variable Overhead Control | 47,500 | ||
(To close the overhead variances) | |||
Cost of Goods Sold | 47,500 | ||
Variable Overhead Spending Variance | 15,500 | ||
Variable Overhead Efficiency Variance | 32,000 | ||
(To close the overhead variances) | |||
Fixed Overhead Spending Variance | 10,000 | ||
Fixed Overhead Volume Variance | 60,000 | ||
Cost of Goods Sold | 70,000 | ||
(To close the cost of goods sold) |
Table (3)
Therefore, the fixed overhead spending and volume variance are $10,000 F and $60,000 U respectively.
Therefore, the variable overhead spending and efficiency variance are $15,500 U and $32,000 U respectively.
5.
Calculate the total direct materials and direct labor usage variances.
Explanation of Solution
Calculate the total direct materials variances:
Calculate the total direct labor usage variances:
Therefore, the total direct materials and direct labor usage variances are $1,400 F and $6,400 U respectively.
Want to see more full solutions like this?
Chapter 9 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- Douglas Davis, controller for Marston, Inc., prepared the following budget for manufacturing costs at two different levels of activity for 20X1: During 20X1, Marston worked a total of 80,000 direct labor hours, used 250,000 machine hours, made 32,000 moves, and performed 120 batch inspections. The following actual costs were incurred: Marston applies overhead using rates based on direct labor hours, machine hours, number of moves, and number of batches. The second level of activity (the right column in the preceding table) is the practical level of activity (the available activity for resources acquired in advance of usage) and is used to compute predetermined overhead pool rates. Required: 1. Prepare a performance report for Marstons manufacturing costs in the current year. 2. Assume that one of the products produced by Marston is budgeted to use 10,000 direct labor hours, 15,000 machine hours, and 500 moves and will be produced in five batches. A total of 10,000 units will be produced during the year. Calculate the budgeted unit manufacturing cost. 3. One of Marstons managers said the following: Budgeting at the activity level makes a lot of sense. It really helps us manage costs better. But the previous budget really needs to provide more detailed information. For example, I know that the moving materials activity involves the use of forklifts and operators, and this information is lost when only the total cost of the activity for various levels of output is reported. We have four forklifts, each capable of providing 10,000 moves per year. We lease these forklifts for five years, at 10,000 per year. Furthermore, for our two shifts, we need up to eight operators if we run all four forklifts. Each operator is paid a salary of 30,000 per year. Also, I know that fuel costs about 0.25 per move. Assuming that these are the only three items, expand the detail of the flexible budget for moving materials to reveal the cost of these three resource items for 20,000 moves and 40,000 moves, respectively. Based on these comments, explain how this additional information can help Marston better manage its costs. (Especially consider how activity-based budgeting may provide useful information for non-value-added activities.)arrow_forwardKrouse Company produces two products, forged putter heads and laminated putter heads, which are sold through specialty golf shops. The company is in the process of developing itsoperating budget for the coming year. Selected data regarding the companys two products areas follows: Manufacturing overhead is applied to units using direct labor hours. Variable manufacturing overhead Ls projected to be 25,000, and fixed manufacturing overhead is expected to be15,000. The estimated cost to produce one unit of the laminated putter head is: a. 42. b. 46. c. 52. d. 62.arrow_forwardSalisbury Bottle Company manufactures plastic two-liter bottles for the beverage industry. The cost standards per 100 two-liter bottles are as follows: At the beginning of March, Salisburys management planned to produce 500,000 bottles. The actual number of bottles produced for March was 525,000 bottles. The actual costs for March of the current year were as follows: a. Prepare the March manufacturing standard cost budget (direct labor, direct materials, and factory overhead) for Salisbury, assuming planned production. b. Prepare a budget performance report for manufacturing costs, showing the total cost variances for direct materials, direct labor, and factory overhead for March. c. Interpret the budget performance report.arrow_forward
- Adam Corporation manufactures computer tables and has the following budgeted indirect manufacturing cost information for the next year: If Adam uses the step-down (sequential) method, beginning with the Maintenance Department, to allocate support department costs to production departments, the total overhead (rounded to the nearest dollar) for the Machining Department to allocate to its products would be: a. 407,500. b. 422,750. c. 442,053. d. 445,000.arrow_forwardNashler Company has the following budgeted variable costs per unit produced: Budgeted fixed overhead costs per month include supervision of 98,000, depreciation of 76,000, and other overhead of 245,000. Required: 1. Prepare a flexible budget for all costs of production for the following levels of production: 160,000 units, 170,000 units, and 175,000 units. 2. What is the per-unit total product cost for each of the production levels from Requirement 1? (Round each unit cost to the nearest cent.) 3. What if Nashler Companys cost of maintenance rose to 0.22 per unit? How would that affect the unit product costs calculated in Requirement 2?arrow_forwardA company estimates its manufacturing overhead will be $840,000 for the next year. What is the predetermined overhead rate given each of the following Independent allocation bases? Budgeted direct labor hours: 90,615 Budgeted direct labor expense: $750000 Estimated machine hours: 150,000arrow_forward
- Colonels uses a traditional cost system and estimates next years overhead will be $480,000, with the estimated cost driver of 240,000 direct labor hours. It manufactures three products and estimates these costs: If the labor rate is $25 per hour, what is the per-unit cost of each product?arrow_forwardBox Springs. Inc., makes two sizes of box springs: queen and king. The direct material for the queen is $35 per unit and $55 is used in direct labor, while the direct material for the king is $55 per unit, and the labor cost is $70 per unit. Box Springs estimates it will make 4,300 queens and 3,000 kings in the next year. It estimates the overhead for each cost pool and cost driver activities as follows: How much does each unit cost to manufacture?arrow_forwardJoyT Company manufactures Maxi Dolls for sale in toy stores. In planning for this year, JoyT estimated variable factory overhead of 600,000 and fixed factory overhead of 400,000. JoyT uses a standard costing system, and factory overhead is allocated to units produced using standard direct labor hours. The level of activity budgeted for this year was 10,000 direct labor hours, and JoyT used 10,300 actual direct labor hours. Based on the output accomplished during this year, 9,900 standard direct labor hours should have been used. Actual variable factory overhead was 596,000, and actual fixed factory overhead was 410,000 for the year. Based on this information, the variable factory overhead controllable variance for JoyT for this year was: a. 24,000 unfavorable. b. 2,000 unfavorable. c. 4,000 favorable. d. 22,000 favorable.arrow_forward
- Moleno Company produces a single product and uses a standard cost system. The normal production volume is 120,000 units; each unit requires 5 direct labor hours at standard. Overhead is applied on the basis of direct labor hours. The budgeted overhead for the coming year is as follows: At normal volume. During the year, Moleno produced 118,600 units, worked 592,300 direct labor hours, and incurred actual fixed overhead costs of 2,150,400 and actual variable overhead costs of 1,422,800. Required: 1. Calculate the standard fixed overhead rate and the standard variable overhead rate. 2. Compute the applied fixed overhead and the applied variable overhead. What is the total fixed overhead variance? Total variable overhead variance? 3. CONCEPTUAL CONNECTION Break down the total fixed overhead variance into a spending variance and a volume variance. Discuss the significance of each. 4. CONCEPTUAL CONNECTION Compute the variable overhead spending and efficiency variances. Discuss the significance of each.arrow_forwardBobcat uses a traditional cost system and estimates next years overhead will be $800.000, as driven by the estimated 25,000 direct labor hours. It manufactures three products and estimates the following costs: If the labor rate is $30 per hour, what is the per-unit cost of each product?arrow_forwardIf a factory operates at 100% of capacity one month, 90% of capacity the next month, and 105% of capacity the next month, will a different cost per unit be charged to the work-in-process account each month for factory overhead assuming that a predetermined annual overhead rate is used?arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningPrinciples of Cost AccountingAccountingISBN:9781305087408Author:Edward J. Vanderbeck, Maria R. MitchellPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
- Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College