Chapter 15, Problem 40P

1.

To determine

Determine the amount of fixed overhead production and volume variance and indicate whether it is Favorable or Unfavorable.

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.

To determine

Determine the finished goods inventory at the year-end for all the capacity level.

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 manufacturing cost per unit:
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.

To determine

Determine the amount of operating profit that should be recorded at the year-end.

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 (@ Standard Cost):
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”:

$\begin{array}{c}\begin{array}{l}\text{Standard manufacturing }\\ \text{cost of goods manufactured}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Number of units produced }\\ \text{× Standard manufacturing }\\ \text{cost per unit}\end{array}\right)\\ =\text{12,250 unit ×\$83}\text{.58 per unit }\\ =\$1,023,896\end{array}$

Determine the standard manufacturing cost of goods manufactured for “Practical capacity”:

$\begin{array}{c}\begin{array}{l}\text{Standard manufacturing }\\ \text{cost of goods manufactured}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Number of units produced }\\ \text{× Standard manufacturing }\\ \text{cost per unit}\end{array}\right)\\ =\text{12,250 unit ×\$86}\text{.18 per unit }\\ =\$1,055,655\end{array}$

Determine the standard manufacturing cost of goods manufactured for “Normal capacity”:

$\begin{array}{c}\begin{array}{l}\text{Standard manufacturing }\\ \text{cost of goods manufactured}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Number of units produced }\\ \text{× Standard manufacturing }\\ \text{cost per unit}\end{array}\right)\\ =\text{12,250 unit ×\$88}\text{.25 per unit }\\ =\$1,081,063\end{array}$

Determine the standard manufacturing cost of goods manufactured for “Budgeted output”:

$\begin{array}{c}\begin{array}{l}\text{Standard manufacturing }\\ \text{cost of goods manufactured}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Number of units produced }\\ \text{× Standard manufacturing }\\ \text{cost per unit}\end{array}\right)\\ =\text{12,250 unit ×\$89}\text{.42 per unit }\\ =\$1,095,354\end{array}$

4.

To determine

Explain the conclusion and indicate the bottom-line information that should be conveyed to the finance committee.

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.

To determine

Explain how the provisions of GAAP on inventory cost affect the decision of fixed overhead production.

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.