Chapter 8, Problem 6BE

To determine

Prepare an income statement through gross profit for the month ended March 31.

Explanation of Solution

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.

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

Company B Income statement through gross profit For the month ended March 31
Sales $\left(\text{15,000 units×\$172}\right)$			2,580,000
Less: Cost of goods sold- at standards (1)			1,463,625
Gross profit- at standards			1,116,375
	Unfavorable $ (a)	Favorable $ (b)
Less: Variances adjustments to gross profit at standards
Direct materials price (5)	9,000
Direct materials quantity (6)		(5,625)
Direct labor rate (8)		(9,270)
Direct labor time (9)	36,000
Factory overhead controllable (11)		(1,230)
Factory overhead volume (12)		(2,300)
Net variances from standard cost – unfavorable (a) – (b)			26,575
Gross-profit			1,089,800

Table (1)

Working notes:

(1)To determine the cost of goods sold-at standards:

  $\begin{array}{c}\begin{array}{l}\text{Cost of goods }\\ \text{sold at standard}\end{array}\}\text{=}\left[\begin{array}{l}\text{Direct materials (2) + Direct}\\ \text{labor (3)+ Factory overheads (4)}\end{array}\right]\\ \text{=\$140,625+1,200,000+123,000}\\ \text{=\$1,463,625}\end{array}$

 (2)Determine the direct materials:

  $\begin{array}{c}\text{Direct materials hours = }\left[\begin{array}{l}\text{No of units required ×Stanadard pounds}\\ \text{per unit×Stanadard price per unit}\end{array}\right]\\ \text{= 15,000 units × 2}\text{.5 lb}\text{.×\$3}\text{.75}\\ \text{=\$140,625}\end{array}$

(3)Determine the direct labor:

  $\begin{array}{c}\text{Direct labor hours = }\left[\begin{array}{l}\text{No of units required ×Stanadard hours}\\ \text{per unit×Stanadard hours rate per hour}\end{array}\right]\\ \text{= 15,000 units × 4 hours ×\$20}\text{.00}\\ \text{=\$1,200,000}\end{array}$

(4)Determine the direct labor:

  $\begin{array}{c}\text{Direct factory overhead=}\left(\begin{array}{l}\text{Number of units}\\ \text{produced×Standard }\\ \text{hours per unit× }\end{array}\right)\text{×}\left(\begin{array}{l}\text{Standard variable overhead}\\ \text{cost per unit+}\text{Standard fixed}\\ \text{overhead cost per unit}\end{array}\right)\\ \text{=15,000 units × 4 hours×}\left(\text{\$0}\text{.90+\$1}\text{.15}\right)\\ \text{=60,000 hours×(2}\text{.05)}\\ \text{=\$123,000}\end{array}$

(5)The direct materials price variance is determined as follows:

  $\begin{array}{c}\text{Direct materials price variance = }\left[\left(\begin{array}{l}\text{Actual price}-\\ \text{Standard price}\end{array}\right)\text{× Actual quantity}\right]\\ =\left[\left(\text{\$4}\text{.00}-\text{\$3}\text{.75}\right)\text{×36,000 lb}\text{.}\right]\\ \text{=\$}\text{0}\text{.25× 36,000}\\ \text{=\$}\text{9,000}\end{array}$

(6)The direct materials quantity variance is determined as follows:

  $\begin{array}{c}\text{Direct materials quantity variance = }\left[\left(\begin{array}{l}\text{Actual quantity}-\\ \text{Standard quantity (7)}\end{array}\right)\text{× Standard price}\right]\\ \text{=}\left[\left(\text{36,000 lb}\text{.}-\text{37,500 lb}\text{.}\right)\text{× \$3}\text{.75}\right]\\ \text{=\$}-1,500\times \$3.75\\ \text{=\$}(5,625)\end{array}$

(7)Determine the standard direct labor hours:

  $\begin{array}{c}\text{Standard quantity = No of units required ×Stanadard pounds per unit}\\ \text{= 15,000 units × 2}\text{.5 lb}\text{.}\\ \text{=37,500 lb}\text{.}\end{array}$

(8)The direct labor rate variance is determined as follows:

  $\begin{array}{c}\text{Direct labor rate variance = }\left[\left(\begin{array}{l}\text{Actual rate per hour}-\\ \text{Standard rate per hour}\end{array}\right)\text{× Actual hours}\right]\\ =\left[\left(\text{\$19}\text{.85}-\text{\$20}\text{.0}\right)\text{×61,800 hours}\right]\\ \text{=\$}-\text{0}\text{.15× 61,800}\\ \text{=\$}(\text{9,270)}\end{array}$

(9)The direct labor time variance is determined as follows:

  $\begin{array}{c}\begin{array}{l}\text{Direct labor }\\ \text{time variance}\end{array}\}\text{ = }\left[\left(\begin{array}{l}\text{Actual direct labor hours}-\\ \text{Standard direct labor hours (10)}\end{array}\right)\text{× Standard rate per hour}\right]\\ =\left[\left(\text{\$61,800}-\text{\$60,000 hours}\right)\text{× \$ 20}\right]\\ \text{=\$}\text{1,800× 20}\\ \text{=\$ 36,000}\end{array}$

 (10)Determine the standard direct labor hours:

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

(11)Determine the variable factory overhead controllable variance.

  $\begin{array}{c}\begin{array}{l}\text{Variable factory overhead}\\ \text{controllable variance}\end{array}\}\text{= }\left(\begin{array}{l}\text{Actual variable factory overhead}-\\ \text{Standard variable factory overhead }\end{array}\right)\\ =\$52,770-\left[\$0.90\times \left(15,000\text{units}\times \text{4hours}\right)\right]\\ \text{=\$52,770}-\$54,000\\ \text{=\$}\left(1,230\right)\end{array}$

  …… (11)

(12) The fixed factory overhead volume variance is determined as follows:

  $\begin{array}{c}\begin{array}{l}\text{Fixed factory overhead}\\ \text{volume variance}\end{array}\}\text{= }\left(\begin{array}{l}\text{Standard hours for 100\% of}\\ \text{normal capacity}-\text{Standard hours }\\ \text{for actual units produced (13)}\end{array}\right)\times \left(\begin{array}{l}\text{Fixed factory }\\ \text{overhead rate}\end{array}\right)\\ \text{= 58,000 hours}-\text{60,000 hours ×\$1}\text{.15}\\ \text{=\$(2,300)}\end{array}$

  …… (12)

(13)Standard hours for actual units produced are determined as follows:

  $\begin{array}{c}\begin{array}{l}\text{Standard hours for}\\ \text{actual units produced}\end{array}\}=\left(\begin{array}{l}\text{Number of units produced}\times \\ \text{Standard hours per unit}\end{array}\right)\\ \text{=15,000 units × 4 hours}\\ \text{=60,000 hours}\end{array}$

  …… (13)

Conclusion

Therefore the gross profit for Company B is $1,089,800.