Basic Variance Analysis, Revision of Standards, Journal Entries Petrillo Company produces engine parts for large motors. The company uses a standard cost system for production costing and control. The standard cost sheet for one of its higher volume products (a valve) is as follows: Direct materials (7 lbs. @ $5.40) $37.80 Direct labor (1.75 hrs. @ $18) 31.50 Variable overhead (1.75 hrs. @ $4.00) 7.00 Fixed overhead (1.75 hrs. @ $3.00) 5.25 Standard cost per unit $81.55 During the year, Petrillo had the following activity related to valve production: Production of valves totaled 20,600 units. A total of 135,500 pounds of direct materials was purchased at $5.36 per pound. There were 10,000 pounds of direct materials in beginning inventory (carried at $5.40 per pound). There was no ending inventory. The company used 36,500 direct labor hours at a total cost of $656,270. Actual fixed overhead totaled $111,000. Actual variable overhead totaled $169,000.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Basic
Petrillo Company produces engine parts for large motors. The company uses a
| Direct materials (7 lbs. @ $5.40) | $37.80 |
| Direct labor (1.75 hrs. @ $18) | 31.50 |
| Variable |
7.00 |
| Fixed overhead (1.75 hrs. @ $3.00) | 5.25 |
| Standard cost per unit | $81.55 |
During the year, Petrillo had the following activity related to valve production:
- Production of valves totaled 20,600 units.
- A total of 135,500 pounds of direct materials was purchased at $5.36 per pound.
- There were 10,000 pounds of direct materials in beginning inventory (carried at $5.40 per pound). There was no ending inventory.
- The company used 36,500 direct labor hours at a total cost of $656,270.
- Actual fixed overhead totaled $111,000.
- Actual variable overhead totaled $169,000.
Petrillo produces all of its valves in a single plant. Normal activity is 20,000 units per year. Standard overhead rates are computed based on normal activity measured in standard direct labor hours.
Required:
3. Compute overhead variances using a two-variance analysis.
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