
1.
Determine the amount of fixed
1.

Explanation of Solution
Compute the amount of fixed overhead production and volume variance:
Particulars | Budgeted Fixed Overhead | Standard Fixed OVH Rate per Hour | Standard Allowed Hours | Fixed OVH Applied to Production | Production Volume Variance |
Alternative | |||||
Theoretical | $350,000 | $11.67 | 24,500 | $285,833 | $64,167U |
Practical | $350,000 | $12.96 | 24,500 | $317,593 | $32,407U |
Normal | $350,000 | $14.00 | 24,500 | $343,000 | $7,000U |
Budgeted | $350,000 | $14.58 | 24,500 | $357,292 | $7,292F |
2.
Determine the finished goods inventory at the year-end for all the capacity level.
2.

Explanation of Solution
Compute the finished goods inventory at the year-end for all the capacity level:
Particulars | Theoretical | Practical | Normal | Budgeted |
Beginning Inventory | $0 | $0 | $0 | $0 |
Add: Units Produced | $12,250 | $12,250 | $12,250 | $12,250 |
Less: Units Sold | $11,500 | $11,500 | $11,500 | $11,500 |
Units in Ending Inventory | $750 | $750 | $750 | $750 |
Standard | ||||
Variable | $60.25 | $60.25 | $60.25 | $60.25 |
Fixed | $23.33 | $25.93 | $28.00 | $29.17 |
Total | $83.58 | $86.18 | $88.25 | $89.42 |
Ending Inventory @ Standard | ||||
Cost | $62,688 | $64,632 | $66,188 | $67,063 |
3.
Determine the amount of operating profit that should be recorded at the year-end.
3.

Explanation of Solution
Compute the amount of operating profit:
Particulars | Theoretical | Practical | Normal | Budgeted |
Revenues | $1,150,000 | $1,150,000 | $1,150,000 | $1,150,000 |
CGS (@ | ||||
Beginning Inventory | $0 | $0 | $0 | $0 |
Add: CGMRD (@ std.) | $1,023,896 | $1,055,655 | $1,081,063 | $1,095,354 |
CGAS | $1,023,896 | $1,055,655 | $1,081,063 | $1,095,354 |
Less: Ending Inventory (@ std.) | $62,688 | $64,632 | $66,188 | $67,063 |
CGS (at standard cost) | $961,208 | $991,023 | $1,014,875 | $1,028,291 |
Volume Variance | $64,167 | $32,407 | $7,000 | -$7,292 |
CGS, Adjusted | $1,025,375 | $1,023,430 | $1,021,875 | $1,020,999 |
Gross Profit | $124,625 | $126,570 | $128,126 | $129,001 |
Less: Operating Expenses | ||||
Variable | $56,925 | $56,925 | $56,925 | $56,925 |
Fixed | $65,000 | $65,000 | $65,000 | $65,000 |
Total | $121,925 | $121,925 | $121,925 | $121,925 |
Operating Income | $2,700 | $4,645 | $6,201 | $7,076 |
Working notes
Determine the standard manufacturing cost of goods manufactured for “Theoretical capacity”:
Determine the standard manufacturing cost of goods manufactured for “Practical capacity”:
Determine the standard manufacturing cost of goods manufactured for “Normal capacity”:
Determine the standard manufacturing cost of goods manufactured for “Budgeted output”:
4.
Explain the conclusion and indicate the bottom-line information that should be conveyed to the finance committee.
4.

Explanation of Solution
The situation is clouded by two factors:
- The cost are assigned to goods for various purposes and denominator of appropriate activity levels.
- There are various treatments for disposal of production volume variance for the current year.
Therefore, finally the allocation method or rate-adjustment method is referred as the ability to manage earnings to decrease the inventory and cost of goods sold account after the rate of re-adjustment at actual cost.
5.
Explain how the provisions of GAAP on inventory cost affect the decision of fixed overhead production.
5.

Explanation of Solution
According to Generally Accepted Accounting Principles (GAAP), the inventory cost has the abnormal amount idle facility expense should be written off as the period expense. Generally, the GAAP states that “normal capacity” be utilized for establishing fixed overhead allocation rates and that can be unallocated to overhead to be realized as an expense of the current year. If the normal capacity is utilized to allocate the fixed overhead cost to the product.
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Chapter 15 Solutions
Cost Management
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