Question

Green River Inc. established the following standards for its principal product, a kit to convert ordinary lawn mowers into mulching mowers:

Direct Materials:

Blades 2 blades @ $13 per blade

Adaptors 1 kit @ $6 per adaptor

Direct Labor:

Grinding ½ hour @ $14 per hour

Finishing & Testing 2/3 hour @ $12 per hour

Overhead

Variable (unit level) $8 per machine hour

Batch Level (total) 50 material moves @ $150 per move

Facility (total) 7,000 square feet @ $2 per square foot

The standard variable overhead cost per conversion kit is $2.

Traditionally, all overhead is applied on the basis of machine hours.

For ABC budgeting, one material move is allowed for every 100 kits produced. The budgeted fixed portion of the batch level cost is $500.

Planned production and sales for the year was 5,000 conversion kits. The planned selling price per kit is $50.

Actual Results

Kits produced & sold 5,200 (this is within the relevant range)

Actual selling price per kit $48

Materials:

Blades Purchased 11,300 blades @ $12.75 per blade

Blades Used 10,900 blades

Adaptors Purchased 5,900 @ $5.60 per adaptor

Adaptors Used 5,650 adaptors

Labor, Grinding 2,800 hours, total cost $42,000

Labor, Finishing & Testing 3,700 hours, total cost $45,325

Machine hours used 1,325 machine hours

Variable Overhead $11,455

Batch Level Overhead (total) $7,938 (54 moves)

Batch Level Overhead (variable) $7,200

Facility Level Overhead $14,500 (7,000 square feet)

A. Prepare the flexible manufacturing cost budget for the year’s actual output.

B. Calculate the sales variances.

C. Calculate the material variances.

D. Calculate the labor variances.

E. What is the unit quantity standard for variable overhead? In other words, how many machine hours are “allowed” for each conversion kit?

F. Calculate the variable (unit level and variable batch) and fixed (fixed batch and facility) overhead variances. Then sum them to get the total of each type of overhead variance. (One set of values for total variable OH variances, one set of values for total fixed OH variances).

G. Prepare appropriate journal entries for C, D, & F.

H. Calculate the total amount (variable, batch & fixed) of over or under applied overhead.

I.    Prepare the journal entries to close the variance accounts. The following balances before allocating variances are:

• Raw Materials,    $5,000
• WIP,                     $8,000
• Finished Goods, $12,000
• COGS,                $60,000

Answer 1

A.	Flexible manufacturing cost budget:
	(Based on 5200 kits)
					$	$
	Direct Materials:
	Blades	(5200*2*13)			135200
	Adaptors	(5200*1*6)			31200	166400
	Direct labor:
	Grinding		(5200*1/2*14)		36400
	Finishing & Testing		(5200*2/3*12)		41600	78000
	Overhead:
	Variable		(5200*2)		10400
	Batch Level		(5200/100)*150		7800
	Facility		(7000*2)		14000	32200
B.	Sales variance=Sales revenue based on planned sales-Actual sales revenue
	(If the answer is positive variance is unfavorable.Otherwise favorable)
	Sales revenue based on planned sales=5000*50=$ 250000
	Actual sales revenue=5200*48=$ 249600
	Sales variance=250000-249600=$ 400 Unfavorable
C.	Material variances=Material cost based on planned production-Actual material cost
	(If the answer is positive variance is favorable.Otherwise unfavorable)
	Material cost based on planned production:
				$
	Blades	(5000*2*13)		130000
	Adaptors	(5000*1*6)		30000
	Total			160000
	Actual material cost=(10900*12.75)+(5650*5.60)=$ 170615
	Material variances=160000-170615=-10615=$ 10615 unfavorable
D.	Labor variances=labor cost based on planned production-Actual labor cost
	(If the answer is positive variance is favorable.Otherwise unfavorable)
	Labor cost based on planned production:
					$
	Grinding		(5000*1/2*14)		35000
	Finishing & Testing		(5000*2/3*12)		40000
	Total				75000
	Actual labor cost=42000+45325=$ 87325
	Labor variances=75000-87325=-12325=$ 12325 Unfavorable
E.	Machine hours allowed per kit=Variable overhead per machine hour/Variable overhead cost per kit=8/2=4