Chapter 23: 18E (page 1310)
List the eight product variances and the manager most likely responsible for each.
The purchasing manager looks after the materials cost and the labor cost by the human resource manager. The production manager looks after efficiency variances and variable and fixed overhead variances.
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Preparing a flexible budget and computing standard cost variances
McKnight Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system. McKnight allocates overhead based on yards of direct materials. The company’s performance report includes the following selected data:
Static Budget (1,025 recliners) | Actual Results (1,005 recliners) | ||
Sales | (1,025 recliners * \(500 each) | \)512,500 | |
(1,005 recliners * \(495 each) | \)497,475 | ||
Variable Manufacturing Costs: | |||
Direct Materials | (6,150 yds. @ \(8.50/yard) | 52,275 | |
(6,300 yds. @ \)8.30/yard) | 52,290 | ||
Direct Labor | (10,250 DLHr @ \(9.20/DLHr) | 94,300 | |
(9,850 DLHr @ \)9.40/DLHr) | 92,590 | ||
Variable Overhead | (6,150 yds. @ \(5.10/yard) | 31,365 | |
(6,300 yds. @ \)6.50/yard) | 40,950 | ||
Fixed Manufacturing Costs: | |||
Fixed Overhead | 62,730 | 64,730 | |
Total Cost of Goods Sold | 240,670 | 250,560 | |
Gross Profit | \(271,830 | \)246,915 |
Requirements
1. Prepare a flexible budget based on the actual number of recliners sold.
2. Compute the cost variance and the efficiency variance for direct materials and for direct labor. For manufacturing overhead, compute the variable overhead cost, variable overhead efficiency, fixed overhead cost, and fixed overhead volume variances. Round to the nearest dollar.
3. Have McKnight’s managers done a good job or a poor job controlling materials, labor, and overhead costs? Why?
4. Describe how McKnight’s managers can benefit from the standard cost system.
Cell One Technologies manufactures capacitors for cellular base stations and other communications applications. The company’s July 2018 flexible budget shows output levels of 6,000, 7,500, and 9,500 units. The static budget was based on expected sales of 7,500 units.
CELL ONE TECHNOLOGIES Flexible Budget For the Month Ended July 31, 2018 |
Budget Amount per Unit |
Units 6,000 7,500 9,500 |
Sales Revenue \(21 \)126,000 \(157,500 \)199,500 |
Variable Expenses 10 60,000 75,000 95,000 |
Contribution Margin 66,000 82,500 104,500 |
Fixed Expenses 55,000 55,000 55,000 |
Operating Income \(11,000 \)27,500 \(49,500 |
The company sold 9,500 units during July, and its actual operating income was as follows:
CELL ONE TECHNOLOGIES Income Statement For the Month Ended July 31, 2018 |
Sales Revenue \)206,500 |
Variable Expenses 100,100 |
Variable Expenses 106,400 |
Fixed Expenses 56,000 |
Operating Income $504,00 |
Requirements
1. Prepare a flexible budget performance report for July.
2. What was the effect on Cell One’s operating income of selling 2,000 units more than the static budget level of sales?
3. What is Cell One’s static budget variance for operating income?
4. Explain why the flexible budget performance report provides more useful information to Cell One’s managers than the simple static budget variance. What insights can Cell One’s managers draw from this performance report?
Question:This Try It! continues the previous Try It! for Tipton Company, a shirt manufacturer. During June, Tipton made 1,200 shirts but had budgeted production at 1,400 shirts. Tipton gathered the following additional data:
Variable overhead cost standard \(0.50 per DLHr
Direct labor efficiency standard 2.00 DLHr per shirt
Actual amount of direct labor hours 2,520 DLHr
Actual cost of variable overhead \)1,512
Fixed overhead cost standard \(0.25 per DLHr
Budgeted fixed overhead \)700
Actual cost of fixed overhead $750
Calculate the following variances:
13. Variable overhead cost variance
14. Variable overhead efficiency variance
15. Total variable overhead variance
16. Fixed overhead cost variance
17. Fixed overhead volume variance
18. Total fixed overhead variance
Computing and journalizing standard cost variances
Middleton manufactures coffee mugs that it sells to other companies for customizing with their own logos. Middleton prepares flexible budgets and uses a standard cost system to control manufacturing costs. The standard unit cost of a coffee mug is based on static budget volume of 59,800 coffee mugs per month:
Direct Materials (0.2 lbs. @ \(0.25 per lb.) \) 0.05 Direct Labor (3 minutes @ \(0.14 per minute) 0.42 Manufacturing Overhead: Variable (3 minutes @ \)0.06 per minute) \( 0.18 Fixed (3 minutes @ \)0.13 per minute) 0.39 0.57 Total Cost per Coffee Mug \( 1.04 |
Actual cost and production information for July 2018 follows:
a. There were no beginning or ending inventory balances. All expenditures were on account.
b. Actual production and sales were 62,500 coffee mugs.
c. Actual direct materials usage was 11,000 lbs. at an actual cost of \)0.17 per lb.
d. Actual direct labor usage of 197,000 minutes at a cost of \(33,490.
e. Actual overhead cost was \)10,835 variable and \(29,965 fixed.
f. Selling and administrative costs were \)130,000.
Requirements
1. Compute the cost and efficiency variances for direct materials and direct labor.
2. Journalize the purchase and usage of direct materials and the assignment of direct
labor, including the related variances.
3. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances.
4. Journalize the actual manufacturing overhead and the allocated manufacturing overhead. Journalize the movement of all production from Work in Process Inventory. Journalize the adjusting of the Manufacturing Overhead account.
5. Middleton intentionally hired more highly skilled workers during July. How did this decision affect the cost variances? Overall, was the decision wise?
Computing standard overhead allocation rates
The following information relates to Morgan, Inc.’s overhead costs for the month:
Static budget variable overhead | \(7,800 |
Static budget fixed overhead | \)3,900 |
Static budget direct labor hours | 1,300 hours |
Static budget number of units | 5,200 units |
Morgan allocates manufacturing overhead to production based on standard direct labor hours. Compute the standard variable overhead allocation rate and the standard fixed overhead allocation rate.
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