Chapter 15, Problem 45P

1.

To determine

Calculate the variances.

Explanation of Solution

Calculate the standard factory overhead rates:

For variable factory overhead:

$\begin{array}{c}\text{Variable factory overhead}=\left(\frac{\text{Variable}}{\text{Direct labor hours}}\right)\\ =\left(\frac{\$3,600,000}{600,000}\right)\\ =\$6\text{ per direct labor hour}\end{array}$

Therefore, the variable factory overhead per hour is $6.

For fixed factory overhead:

$\begin{array}{c}\text{Fixed factory overhead}=\left(\frac{\text{Fixed}}{\text{Direct labor hours}}\right)\\ =\left(\frac{\$3,000,000}{600,000}\right)\\ =\$5\text{ per direct labor hour}\end{array}$

Therefore, the fixed factory overhead per hour is $5.

a) Calculate the variable overhead spending variance:

$\begin{array}{c}\text{Spending variance}=\left(\text{Actual cost}-\left(\text{Standard price}\times \text{Actual quantity}\right)\right)\\ =\left(\$315,000-\left(53,500\text{ hours}\times \text{\$6 per hour}\right)\right)\\ =\$6,000\text{ F}\end{array}$

Therefore, the spending variance is $6,000 F.

b) Calculate the variable overhead efficiency variance:

$\begin{array}{c}\text{Efficiency variance}=\left\{\begin{array}{l}\left(\text{Standard price}\times \text{Actual quantity}\right)\\ -\left(\text{Standard price}\times \text{Standard quantity}\right)\end{array}\right\}\\ =\left\{\left(53,500\text{ hours}\times \text{\$6 per hour}\right)-\left(52,000\text{ hours}\times \text{\$6 per hour}\right)\right\}\\ =\$9,000\text{ U}\end{array}$

Therefore, the efficiency variance is $9,000 U.

Calculate the budgeted fixed manufacturing overhead per month:

$\begin{array}{c}\text{Budgeted fixed manufacturing}=\left(\frac{\text{Fixed}}{12\text{ months}}\right)\\ =\left(\frac{\$3,000,000}{12\text{ months}}\right)\\ =\$250,000\end{array}$

c) Calculate the fixed overhead spending variance:

$\begin{array}{c}\text{Spending variance}=\left(\text{Actual}-\text{Budgeted}\right)\\ =\left(\text{\$260,000}-\$250,000\right)\\ =\$10,000\text{ U}\end{array}$

Therefore, the spending variance is $10,000 U.

d) Calculate the fixed overhead production volume variance:

$\begin{array}{c}\text{Production volume variance}=\left(\text{Budgeted}-\text{Applied}\right)\\ =\left(\$250,000-\left(26,000\times 2\times \$5\right)\right)\\ =\$10,000\text{ F}\end{array}$

Therefore, the production volume variance is $10,000 F.

e) Calculate the total amount of under or over applied:

$\begin{array}{c}\text{Under applied or over applied}=\left(\begin{array}{l}\$6,000(\text{a)}-\$9,000(\text{b)}\\ -\$10,000(\text{c)}+\$10,000(\text{d)}\end{array}\right)\\ =\$3,000\text{ underapplied}\end{array}$

Therefore, the total amount of under applied overhead is $3,000.

2.

To determine

Journalize the following.

Explanation of Solution

Journalize the following:

Date	Title and explanation	Debit ($)	Credit ($)
	Variable factory overhead	315,000
	Utilities payable		315,000
	(To record the actual variable overhead costs for the period)
	WIP inventory	312,000
	Variable factory overhead		312,000
	(To record the standard variable overhead costs to production)
	Variable factory overhead	312,000
	Variable overhead efficiency variance	9,000
	Variable overhead spending variance		6,000
	Variable factory overhead		315,000
	(To record the variable overhead variance for the period)
	Fixed factory overhead	260,000
	Salaries payable, accumulated depreciation		260,000
	(To record actual fixed overhead costs for the period)
	WIP inventory	260,000
	Fixed factory overhead		260,000
	(To record the standard fixed overheads costs to production)
	Fixed factory overhead	260,000
	Fixed factory overhead spending variance	10,000
	Production volume variance		10,000
	Fixed factory overhead		260,000
	(To record the fixed overhead variances for the period)

Table (1)

3.

To determine

Journalize the closing entry.

Explanation of Solution

Journalize the closing entry:

Date	Particulars	Debit ($)	Credit ($)
	Variable overhead spending variance	6,000
	Production volume variance	10,000
	Cost of goods sold	3,000
	Variable overhead efficiency variance		9,000
	Fixed overhead spending variance		10,000
	(To record the closing entry)

Table (2)

4.

To determine

Determine the manner in which the provisions of GAAP regarding inventory costing is applicable to the end of period variance deposition.

Explanation of Solution

The GAAP specifies the usage of normal capacity for establishing fixed overhead allocation rates and when unallocated overhead are recognized, it will be treated as an expense for that period. While there is no clarity then, the GAAP suggests that the unallocated overhead will be treated as abnormal period cost.

5.

To determine

Describe the manner of managing the reported earnings under absorption costing under the method of disposing the fixed overhead cost variances during the year-end.

Explanation of Solution

The fixed overhead costs absorbed from the inventory are affected by the denominator that is selected to compute the pre-determined fixed overhead application rate. The denominator volume affects the amount of production volume variance for the period. The effect of the change in physical inventory can be intensified or reduced depending on the manner in which the production volume variance is disposed at the end of the period. Moreover, the ability to affect the reported income is confined to the circumstance in which the production volume variance is written off. Following are the manner in which it is written off to the cost of goods sold:

• When the inventory is increasing, a lower volume level will boost up the increase in absorption costing income due to the deferral of fixed overhead in inventory.
• In case inventory is decreasing, a higher denominator level will moderate a decrease in the absorption-costing income. This is because of the release of fixed overhead into the cost of goods sold.

Therefore, the interaction of the fixed overhead rate is set and the manner in which the resulting production volume variance is accounted for that provides management an opportunity to manage the earnings under absorption costing. Following are the ways in which managers can increase the short-run operating income:

• Choose a larger denominator level in case the inventory is expected to decrease.
• Choose a smaller denominator level in case the inventory is expected to increase.

When the production volume variance is prorated based on the units that create a variance, the denominator-level choice has no effect on the absorption costing income. This is due to the reason that prorating such a variance effectively changes the budgeted overhead application rate with respect to the actual overhead rate.