Question

Cost Accounting

Butrico Manufacturing Corporation uses a standard cost system, records materials price variances when direct materials are purchased, and prorates all variances at year-end. Variances associated with direct materials are prorated based on the balances of direct materials in the appropriate accounts, and variances associated with direct labor and manufacturing overhead are prorated to Finished Goods Inventory and to Cost of Goods Sold (CGS) on the basis of the relative direct labor cost in these accounts at year-end.

The following information is for the year ended December 31:

The company had no beginning inventories and no ending Work-in-Process (WIP) Inventory. It applies manufacturing overhead at 80% of standard direct labor cost.

Finished goods inventory at 12/31:                                       

Direct materials $             85,900

Direct labor                      130,300              

Applied manufacturing overhead                             104,800              

Direct materials inventory at 12/31                        65,400

Cost of goods sold for the year ended 12/31:                               

Direct materials $             354,100              

Direct labor                      741,100              

Applied manufacturing overhead                             592,900              

Direct materials price variance (unfavorable)                   11,600

Direct materials usage variance (favorable)                       15,400

Direct labor rate variance (unfavorable)                19,800

Direct labor efficiency variance (favorable)                       5,700   

Actual manufacturing overhead incurred                             691,900              

1. Compute the amount of Direct Materials Price Variance to be prorated to Finished Goods Inventory at December 31.

Answer 1

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Butrico Manufacturing Corporation

If proration method is used then variance will be charged to cost of goods sold, finished goods and raw materials inventory proportionately.

	Cost of direct materials	Weight %	Remarks	Material price variance	Allocated overhead	Remarks
Cost of goods sold	354,100.00	70.06%	This is $ 354,100/ $ 505,400.	11,600.00	8,127.34	This is $ 11,600* 70.06%.
Finished goods	85,900.00	17.00%	This is $ 85,900/ $ 505,400.	11,600.00	1,971.59	This is $ 11,600* 17%.
Raw Materials	65,400.00	12.94%	This is $ 65,400/ $ 505,400.	11,600.00	1,501.07	This is $ 11,600* 12.94%.
	505,400.00				11,600.00

So $ 1,971.59 is the amount of Direct Materials Price Variance to be prorated to Finished Goods Inventory at December 31.