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Concept explainers
Ingles Company manufactures external hard drives. At the beginning of the period, the following plans for production and costs were revealed:
During the year, 24,800 units were produced and sold. The following actual costs were incurred:
There were no beginning or ending inventories of direct materials. The direct materials price variance was $10,168 unfavorable. In producing the 24,800 units, a total of 12,772 hours were worked, 3 percent more hours than the standard allowed for the actual output.
Required:
- 1. Prepare a performance report comparing expected costs to actual costs.
- 2. Determine the following:
- a. Direct materials usage variance
- b. Direct labor rate variance
- c. Direct labor usage variance
- d. Fixed overhead spending and volume variances
- e. Variable overhead spending and efficiency variances
- 3. Use T-accounts to show the flow of costs through the system. In showing the flow, you do not need to show detailed overhead variances. Show only the over- and underapplied variances for fixed and variable overhead.
1.
![Check Mark](/static/check-mark.png)
Prepare a performance report by comparing the expected costs to actual costs.
Explanation of Solution
Flexible budget performance report: This report associates actual performance and budgeted performance on par with actual sales volume. Flexible budget performance report gains the management attention to the cost or revenues that differ from budgeted amount.
A flexible budget performance report is used for analyzing the difference between actual performance and budgeted performance. It is also called as variance analysis. Its usefulness comes from the budgeted and actual results that are based on similar level of activity.
Prepare a performance report by comparing the expected costs to actual costs:
Particulars | Actual Cost | Flexible Budget Cost | Variance |
Direct materials | 264,368 | 248,000 | 16,368 U |
Direct labor | 204,352 | 198,400 | 5,952 U |
Variable overhead | 107,310 | 99,200 | 8,110 U |
Fixed overhead | 73,904 | 75,000 | 1,096 F |
Total cost | $649,934 | $620,600 | $29,334 U |
Table (1)
Working note 1: Calculate the budgeted cost for direct materials:
Working note 2: Calculate the budgeted cost for direct labor:
Working note 3: Calculate the budgeted cost for variable overhead:
Working note 4: Calculate the budgeted cost for fixed overhead:
Note: Fixed overhead unit is based on 25,000.
2.
![Check Mark](/static/check-mark.png)
Calculate the followings:
- a. Direct materials usage variance.
- b. Direct labor rate variance.
- c. Direct labor usage variance.
- d. Fixed overhead spending and volume variances.
- e. Variable overhead spending and efficiency variances.
Explanation of Solution
a.
Direct material usage (efficiency) variance: It is a measure that determines the variation in between actual and standard quantity of input multiplied by the standard unit price is called material usage variance.
The following formula is used to calculate direct material usage variance:
Calculate direct materials usage variance by using total variance formula:
b.
Direct Labor Rate Variance: The direct labor rate variance is a measure to determine the variation in the estimated cost of the direct labor and the actual cost of the direct labor and is multiplied by the actual hours is called direct labor rate variance.
The following formula is used to calculate the direct labor rate variance:
Calculate direct labor rate variance:
Step 1: Calculate standard hour.
Step 2: Calculate standard rate.
Step 3: Calculate direct labor rate variance.
c.
Direct labor efficiency variance is a measure that determines the difference between the estimated labor hours and the actual labor hours used and is multiplied by the standard rate per hour is called material usage variance.
The following formula is used to calculate direct labor efficiency variance:
Calculate the direct labor usage or efficiency variance:
d.
Fixed overhead spending variance: It is the difference between actual fixed overhead and the budgeted fixed overhead.
The following formula is used to calculate fixed overhead spending variance:
Calculate the fixed overhead spending variance:
Fixed overhead volume variance: It is the difference between budgeted fixed overhead and the applied fixed overhead.
The following formula is used to calculate fixed overhead volume variance:
Calculate the volume variance:
Working note 5: Calculate the applied fixed overhead:
Working note 6: Calculate the standard fixed overhead rate:
e.
Spending variances: It arises when management pays an amount which is different from the standard price for purchasing an item. The variable overhead spending variance measures the total effect of differences in the actual variable overhead rate (AVOR) and the standard variable overhead rate (SVOR).
Efficiency variances: It arises when standard direct labor hours expected for actual production different from labor the actual direct labor hours used.
Variable overhead efficiency variance tells managers how much of the total variable manufacturing overhead variance is due to using more or fewer machine hours than anticipated for the actual volume of output.
Calculate variable overhead spending variance:
Calculate variable overhead efficiency variance:
3.
![Check Mark](/static/check-mark.png)
Prepare T-accounts to show the flow of costs through the system.
Explanation of Solution
T-account: The condensed form of a ledger is referred to as T-account. The left-hand side of this account is known as debit, and the right hand side is known as credit.
Prepare T-accounts to show the flow of costs through the system:
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Chapter 9 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- Flaherty, Inc., has just completed its first year of operations. The unit costs on a normal costing basis are as follows: During the year, the company had the following activity: Actual fixed overhead was 12,000 less than budgeted fixed overhead. Budgeted variable overhead was 5,000 less than the actual variable overhead. The company used an expected actual activity level of 12,000 direct labor hours to compute the predetermined overhead rates. Any overhead variances are closed to Cost of Goods Sold. Required: 1. Compute the unit cost using (a) absorption costing and (b) variable costing. 2. Prepare an absorption-costing income statement. 3. Prepare a variable-costing income statement. 4. Reconcile the difference between the two income statements.arrow_forwardWyandotte Company provided the following information for the last calendar year: During the year, direct materials purchases amounted to 256,900, direct labor cost was 176,000, and overhead cost was 308,400. There were 40,000 units produced. Required: 1. Calculate the total cost of direct materials used in production. 2. Calculate the cost of goods manufactured. Calculate the unit manufacturing cost. 3. Of the unit manufacturing cost calculated in Requirement 2, 6.62 is direct materials and 7.71 is overhead. What is the prime cost per unit? Conversion cost per unit?arrow_forwardEllerson Company provided the following information for the last calendar year: During the year, direct materials purchases amounted to 278,000, direct labor cost was 189,000, and overhead cost was 523,000. During the year, 100,000 units were completed. Required: 1. Calculate the total cost of direct materials used in production. 2. Calculate the cost of goods manufactured. Calculate the unit manufacturing cost. 3. Of the unit manufacturing cost calculated in Requirement 2, 2.70 is direct materials and 5.30 is overhead. What is the prime cost per unit? Conversion cost per unit?arrow_forward
- During the week of August 21, Parley Manufacturing produced and shipped 4,000 units of its machine tools: 1,500 units of Tool SK1 and 2,500 units of Tool SK3. The cycle time for SK1 is 0.73 hour, and the cycle time for SK3 is 0.56 hour. The following costs were incurred: Required: 1. Assume that the value-stream costs and total units shipped apply only to one model (a single-product value stream). Calculate the unit cost, and comment on its accuracy. 2. Assume that Tool SK1 is responsible for 60% of the materials cost. Calculate the unit cost for Tool SK 1 and Tool SK3, and comment on its accuracy. Explain the rationale for using units shipped instead of units produced in the calculation. 3. Calculate the unit cost for the two models, using DBC. Explain when and why this cost is more accurate than the unit cost calculated in Requirement 2.arrow_forwardDuring the week of May 10, Hyrum Manufacturing produced and shipped 16,000 units of its aluminum wheels: 4,000 units of Model A and 12,000 units of Model B. The cycle time for Model A is 1.09 hours and for Model B is 0.47 hour. The following costs and production hours were incurred: Required: 1. Assume that the value-stream costs and total units shipped apply only to one model (a single-product value stream). Calculate the unit cost, and comment on its accuracy. 2. Assume that Model A is responsible for 40% of the materials cost. Calculate the unit cost for Models A and B, and comment on its accuracy. Explain the rationale for using units shipped instead of units produced in the calculation. 3. Calculate the unit cost for the two models, using DBC. Explain when and why this cost is more accurate than the unit cost calculated in Requirement 2.arrow_forwardAt the beginning of the year, Lopez Company had the following standard cost sheet for one of its chemical products: Lopez computes its overhead rates using practical volume, which is 80,000 units. The actual results for the year are as follows: (a) Units produced: 79,600; (b) Direct labor: 158,900 hours at 18.10; (c) FOH: 831,000; and (d) VOH: 112,400. Required: 1. Compute the variable overhead spending and efficiency variances. 2. Compute the fixed overhead spending and volume variances.arrow_forward
- During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 41,000 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 38,000 scoops. Fixed overhead was applied at $0.70 per unit produced. Fixed overhead was underapplied by $2,900. This fixed overhead variance was closed to Cost of Goods Sold. There was no variable overhead variance. The results of the year's operations are as follows (on an absorption-costing basis): Sales (38,000 units @ $20) $760,000 Less: Cost of goods sold 550,260 Gross margin $209,740 Less: Selling and administrative expenses (all fixed) 185,500 Operating income $ 24,240 Required: 1. Calculate the cost of the firm's ending inventory under absorption costing. Round unit cost to five decimal places. Round your final answer to the nearest dollar.$__________ What is the cost of the ending inventory under variable costing? Round unit cost to five…arrow_forwardDuring its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,000 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 38,200 scoops. Fixed overhead was applied at $0.75 per unit produced. Fixed overhead was underapplied by $2,900. This fixed overhead variance was closed to Cost of Goods Sold. There was no variable overhead variance. The results of the year’s operations are as follows (on an absorption-costing basis): Required:1. Calculate the cost of the firm’s ending inventory under absorption costing. What is the costof the ending inventory under variable costing? (Round unit costs to five significant digits.)2. Prepare a variable-costing income statement. Reconcile the difference between the twoincome figures.arrow_forwardEdina Co. manufactures a product that requires 3.5 machine hours per unit. The variable and fixed overhead rates were computed using expected capacity of 144,000 units (produced evenly throughout the year) and expected variable and fixed overhead costs, respectively, of $2,016,000 and $3,528,000. In October, Edina manufactured 11,800 units using 40,800 machine hours. October variable overhead costs were $171,000; fixed overhead costs were $284,500. What are the standard variable and fixed overhead rates? Compute the variable overhead variances. Compute the fixed overhead variances. Explain the volume variance computed in part (c).arrow_forward
- The management of Gregory Corporation believes that the inspection cost is a mixed cost that depends on units produced. The high- low method is used to estimate the variable and fixed components of this cost. The total inspection costs at Gregory's factory are listed below. Month Units Produced Inspection Cost January 990 $21,730 February 985 $21,645 March 807 $18,619 April 650 $15,950 May 760 $17,820 June 870 $19,690 July 8OS S18,585 August 810 SI8,670 September 700 $16,800arrow_forwardQueen Industries uses a standard costing system in the manufacturing of its single product. It requires 2 hours of labor to produce 1 unit of final product. In February, Queen Industries produced 12,000 units. The standard cost for labor allowed for the output was $90,000, and there was an unfavorable direct labor time variance of $5,520. NOTE: All dollar amounts are rounded to whole dollars and shown with "$" and commas as needed (i.e. $12,345). For the variance conditions, your answer is either "F” (for Favorable) or "U” (for Unfavorable) - capital letter and no quotes. What was the standard rate per hour? standard rate per hour. (with "$" round answer to two decimal places with commas as needed) How many actual hours were worked? actual hours. (round answer to whole number with commas as needed) Complete the following table of variances and their conditions: Variance Variance Amount Favorable (F) or Unfavorable (U) Labor Rate Labor Time Total DL Cost…arrow_forwardSierra Water Corporation uses a standard cost system for the production of its transistors. The direct labor standard for each transistor is 0.9 hours. The standard direct labor cost per hour is $7.20. During the month of July, Sierra's transistors production used 6,600 direct labor-hours at a total direct labor cost of $46,708. This resulted in production of 6,900 transistors for July. What is Sierra's labor efficiency variance for July? A. $812 Favorable B. $1,188 Unfavorable C. $1,188 Favorable D. $2,808 Unfavorablearrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
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