Chapter 8, Problem 1MC

Binghamton Beverages Inc.

Variance analysis; journal entries; other analyses for multiple departments Cost and production data for Binghamton Beverages Inc. are presented as follows:

Required:

1. 1. a. Calculate net variances for materials, labor, and factory overhead.

b. Calculate specific materials and labor variances by department, using the diagram format in Figure 8-4.

c. Comment on the possible causes for each of the variances that you computed.

1. 2. Make all journal entries to record production costs in Work in Process and Finished Goods.
2. 3. Determine the balance of ending Work in Process in each department.
3. 4. Assume that 4,000 units were sold at $40 each.
   1. a. Calculate the gross margin based on standard cost.
   2. b. Calculate the gross margin based on actual cost.
      1. c. Why does the gross margin at actual cost differ from the gross margin at standard cost.
   3. 5. As the plant controller, you present the variance report in Item 1 above to Paul Crooke, the plant manager. After reading it, Paul states: “If we present this performance report to corporate with that large unfavorable labor variance in Blending, nobody in the plant will receive a bonus. Those standard hours of 5,500 are way too tight for this production process. Fifty-eight hundred hours would be more reasonable, and that would result in a favorable labor efficiency variance that would more than offset the unfavorable labor rate variance. Please redo the variance calculations using 5,800 hours as the standard.” You object, but Paul ends the conversation with, “That is an order.”
      1. a. What standards of ethical professional practice would be violated if you adhered to Paul’s order?
      2. b. How would you attempt to resolve this ethical conflict?

To determine

Compute the net variances for materials, labor, and factory overhead.

Explanation of Solution

Compute the net variances for materials, labor, and factory overhead.

Figure (1)

Working note:

Calculate the equivalent units in Mixing:

$\begin{array}{c}\text{Equivalent units}=6,000+\left(1/2\times 2,000\right)\\ =6,000+1,000\\ =7,000\end{array}$

Calculate the equivalent units in Blending:

$\begin{array}{c}\text{Equivalent units}=5,000+\left(1/2\times 1,000\right)\\ =5,000+500\\ =5,500\end{array}$

To determine

Compute the specific materials and labor variances by department.

Explanation of Solution

Compute the specific materials and labor variances by department.

Materials:

Mixing:

Figure (2)

Blending:

Figure (3)

Labor:

Mixing:

Figure (4)

Blending:

Figure (5)

To determine

Describe the possible causes for every variance from the computation.

Explanation of Solution

Possible causes for every variance from the computation.

In the mixing department, both the materials price variance and the materials quantity variance are unfavorable. If they willing to pay more amount for a superior quality material in anticipation to have a minimum amount of waste and spoilage, and that the strategy is unsuccessful and it is possible to increase the price for material that is not predict while the standards to determine. In the mixing department labor variances is more satisfied. There is no labor rate variance and the labor efficiency variance is favorable. So, this shows that the given ability of labor they budgeted for, the amount of labor time need to complete the production is less than the budgeted and there is a favorable variance due to a learning effect.

In the blending department, there is a favorable materials price variance and no materials quantity variance. This shows that they are capable to use minimum expensive materials than the budgeted for, while maintaining good control over materials usage. It is also probable that the price of materials of the quality that is planned to declined. A difficulty faced in the blending department is labor cost. So, the labor rate variance and the labor efficiency variance are unfavorable. If the strategy is to employ more expensive labor to complete the production of product by short time period is unsuccessful.

To determine

Prepare the journal entry to record the production cost in work in process and finished goods.

Explanation of Solution

Prepare the journal entry to record the transaction.

Particulars	Debit($)	Credit($)
Work in Process—Mixing	14,000
Materials Quantity Variance— Mixing	1,000
Materials Price Variance— Mixing	600
Materials		15,600
Work in Process-Blending	5,500
Materials Price Variance— Blending		275
Materials		5,225
Factory overhead $\left(\text{Indirect materials}-\$500=\$1,500\right)$	1,500
Materials		1,500
Work in Process—Mixing	56,000
Labor Efficiency Variance— Mixing		1,600
Payroll		54,400
Work in Process— Blending	55,000
Labor Efficiency Variance— Blending	1,000
Labor Rate Variance—Blending	1,120
Payroll		57,120
Factory overhead $\left(\text{Indirect labor}-\$2,000=\$5,000\right)$	7,000
Payroll		7,000
Factory overhead $\left(\$4,500+\$5,000\right)$	9,500
Various credits (Accounts payable, prepaid insurance, etc)		9,500
Work in Process—Mixing	7,000
Work in Process—Blending	11,000
Applied Factory Overhead		18,000
Work in Process—Blending $\left(6,000\times \$11\right)$	66,000
Work in Process—Mixing		66,000
Finished Goods $\left(5,000\times \$24\right)$	1,20,000
Work in Process—Blending		1,20,000

Table (1)

To determine

Calculate the ending work-in process for every department.

Explanation of Solution

Calculate the ending work-in process for every department.

Particulars	Mixing	Blending
Costs charged to departments:
Materials	$14,000	$5,500
Labor	56,000	55,000
Factory overhead	7,000	11,000
Prior department	0	66,000
	$77,000	$137,500
Less: Costs transferred out of departments	66,000	120,000
Balance of work in process	$11,000	$17,500

Table (2)

To determine

Calculate the gross margin for standard cost and for actual cost.

Explanation of Solution

Calculate the gross margin for standard cost and for actual cost.

S. no	Particulars	Amount
	Sales $\left(4,000\times \$40\right)$	$160,000
	Less: Cost of goods sold at standard $\left(4,000\times \$24\right)$	96,000
a.	Gross margin at standard cost	$64,000
	Net unfavorable variance	1,845
b.	Gross margin at actual cost	$62,155

Table (3)

To determine

Explain the reason that the gross margin at actual cost differ from the standard cost,

Explanation of Solution

Reason for the difference:

Actual cost goes beyond the standard cost and results the unfavorable variance of $1,845, it is the reason for gross margin at actual cost is a lesser amount than the gross margin standard cost. In a standard cost system, the cost of production runs through the system at standard during the accounting period. During the ending period, standard cost is adjusted toward the actual while preparing the financial statements for external users.

To determine

Explain the violation of ethical professional practice if hold on to P order.

Explanation of Solution

No, P told to act as unethical. The labor standards are used to for the earlier agreed to P and other superior. Specific IMA ethical standards will be violated by making the following changes,

Competence: Provide the support to make decision and suggestions are accurate, clear, concise, and timely.

Integrity: Withdraw from the engage in or underneath any activity that discredit the profession.

Credibility: 1) Information needs to communicate fairly and objectively. 2) Reveal all information that is expected by user’s to understand the reports, analyses, or recommendations.

To determine

Describe the method to resolve this ethical conflict.

Explanation of Solution

Method to resolve this ethical conflict:

Follow the organization policy to resolve the conflict. If the organization policy does not resolve the conflict then other option is IMA’s suggested resolution of ethical conflict. In this case, present the information to the next level of management above P to the VP of manufacturing. This will be resolving this issue.