Chapter 23, Problem 23.6APE

To determine

Income statement with variances:

The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement. In the income statement with variances, the balance of each variances account indicates the favorable and unfavorable variance at the end of the period.

Gross Profit:

Gross Profit is the difference between the net sales, and the cost of goods sold. Gross profit usually appears on the income statement of the company.

To prepare: An income statement through gross profit for the month ended March 31.

Explanation of Solution

The income statement through gross profit for the month ended March 31 for Company LB is as follows:

Company LB Income statement through gross profit For the month ended March 31,2016
Sales $\left(\text{4,000 units×\$250}\right)$			$1,000,000
Less: Cost of goods sold- at standards(1)			675,200
Gross- profit- at standards			$324,800
	Unfavorable$ (a)	Favorable $ (b)
Less: Variances adjustments to gross profit at standards
Direct materials price (5)	2,050
Direct materials quantity(6)		(4,000)
Direct labor rate (8)		(6,700)
Direct labor time (9)		(21,000)
Factory overhead controllable (11)		(3,240)
Factory overhead volume(12)		(480)
Net variances from standard cost – unfavorable (a) – (b)			(33,370)
Gross-profit			$291,430

Table (1)

Working notes:

To determine the cost of goods sold-at standards:

$\begin{array}{c}\begin{array}{l}\text{Cost of goods }\\ \text{sold at standard}\end{array}\}\text{=}\left[\begin{array}{l}\text{Direct materials (2) + Direct}\\ \text{labor (3)+ Factory overheads (4)}\end{array}\right]\\ \text{=\$160,000+448,000+67,200}\\ \text{=\$675,200}\end{array}$ (1)

Determine the direct materials:

$\begin{array}{c}\text{Direct materials = }\left[\begin{array}{l}\text{No of units required ×Stanadard pounds}\\ \text{per unit×Stanadard price per unit}\end{array}\right]\\ \text{= 4,000 units × 2}\text{gal}\text{.×\$20}\text{.00}\\ \text{=\$160,000 }\end{array}$ (2)

Determine the direct labor:

$\begin{array}{c}\text{Direct labor = }\left[\begin{array}{l}\text{No of units required ×Stanadard hours}\\ \text{per unit×Stanadard hours rate per hour}\end{array}\right]\\ \text{= 4,000 units × 4 hours ×\$28}\text{.00}\\ \text{=\$448,000}\end{array}$ (3)

Determine the factory overheads:

$\begin{array}{c}\text{Factory overhead=}\left(\begin{array}{l}\text{Number of units}\\ \text{produced×Standard }\\ \text{hours per unit× }\end{array}\right)\text{×}\left(\begin{array}{l}\text{Standard variable overhead}\\ \text{cost per unit+}\text{Standard fixed}\\ \text{overhead cost per unit}\end{array}\right)\\ \text{=4,000 units × 4 hours×}\left(\text{\$3}\text{.00+\$1}\text{.20}\right)\\ \text{=16,000 hours×\$4}\text{.20}\\ \text{=\$67,200}\end{array}$ (4)

The direct materials price variance is determined as follows:

$\begin{array}{c}\text{Direct materials price variance = }\left[\left(\begin{array}{l}\text{Actual price}-\\ \text{Standard price}\end{array}\right)\text{× Actual quantity}\right]\\ =\left[\left(\text{\$19}\text{.75}-\text{\$20}\text{.00}\right)\text{×8,200 gal}\text{.}\right]\\ \text{=\$}\left(\text{0}\text{.25}\right)\text{× 8,200 gal}\text{.}\\ \text{=\$}\left(2,050\right)\end{array}$ (5)

The direct materials quantity variance is determined as follows:

$\begin{array}{c}\left[\begin{array}{l}\text{Direct materials }\\ \text{quantity variance}\end{array}\right]\text{ = }\left[\left(\begin{array}{l}\text{Actual quantity}-\\ \text{Standard quantity }\end{array}\right)\text{× Standard price}\right]\\ =\left[\left(8,200\text{gal}\text{.}-8,000\text{}\text{gal}\text{.}\right)\text{× \$20}\text{.00}\right]\\ \text{=\$}200\text{gal}\text{.× \$20}\text{.00}\\ \text{=\$4,000}\end{array}$ (6)

The direct labor rate variance is determined as follows:

$\begin{array}{c}\text{Direct labor rate variance = }\left[\left(\begin{array}{l}\text{Actual rate per hour}-\\ \text{Standard rate per hour}\end{array}\right)\text{× Actual hours}\right]\\ =\left[\left(\text{\$28}\text{.40}-\text{\$28}\text{.00}\right)\text{×16,750 hours}\right]\\ \text{=\$}0.40\text{× 16,750}\\ \text{=\$}6,700\end{array}$ (8)

The direct labor time variance is determined as follows:

$\begin{array}{c}\begin{array}{l}\text{Direct labor }\\ \text{time variance}\end{array}\}\text{ = }\left[\left(\begin{array}{l}\text{Actual direct labor hours}-\\ \text{Standard direct labor hours}\end{array}\right)\text{× Standard rate per hour}\right]\\ =\left[\left(\text{16,750}-\text{\$16,000 hours}\right)\text{× \$ 28}\text{.00}\right]\\ \text{=750 hours× \$28}\text{.00}\\ \text{=\$ 21,000}\end{array}$ (9)

Determine the standard direct labor hours:

$\begin{array}{c}\begin{array}{l}\text{Standard direct }\\ \text{labor hours}\end{array}\}\text{ = No of units required ×Stanadard hours per unit}\\ \text{= 15,000 units × 4 hours}\\ \text{=60,000 hours}\end{array}$ (10)

Determine the variable factory overhead controllable variance.

$\begin{array}{c}\begin{array}{l}\text{Variable factory overhead}\\ \text{controllable variance}\end{array}\}\text{= }\left(\begin{array}{l}\text{Actual variable factory overhead}-\\ \text{Standard variable factory overhead }\end{array}\right)\\ =\$51,240-\left[\$3.00\times \left(4,000\text{units}\times \text{4hours}\right)\right]\\ \text{=\$51,240}-\$48,000\\ \text{=\$3,240}\end{array}$ (11)

The fixed factory overhead volume variance is determined as follows:

$\begin{array}{c}\begin{array}{l}\text{Fixed factory overhead}\\ \text{volume variance}\end{array}\}\text{= }\left(\begin{array}{l}\text{Standard hours for 100\% of}\\ \text{normal capacity}-\text{Standard hours }\\ \text{for actual units produced (13)}\end{array}\right)\times \left(\begin{array}{l}\text{Fixed factory }\\ \text{overhead rate}\end{array}\right)\\ \text{= 16,400 hours}-1\text{6,000 hours ×\$1}\text{.20}\\ \text{=\$480}\end{array}$ (12)

Standard hours for actual units produced are determined as follows:

$\begin{array}{c}\begin{array}{l}\text{Standard hours for}\\ \text{actual units produced}\end{array}\}=\left(\begin{array}{l}\text{Number of units produced}\times \\ \text{Standard hours per unit}\end{array}\right)\\ \text{=4,000 units × 4 hours}\\ \text{=16,000 hours}\end{array}$ (13)

Conclusion

Therefore, the gross profit for Company LB is $291,430.