Question

Slick Corporation is a small producer of synthetic motor oil. During May, the company produced 5,000 cases of lubricant. Each case contains 12 quarts of synthetic oil. To achieve this level of production, Slick purchased and used 16,500 gallons of direct materials at a cost of $20,365. It also incurred average direct labor costs of $15 per hour for the 3,807 hours worked in May by its production personnel. Manufacturing overhead for the month totaled $9,115, of which $2,200 was considered fixed. Slick's standard cost information for each case of synthetic motor oil is as follows.

Direct materials standard price	$	1.30	per gallon
Standard quantity allowed per case		3.25	gallons
Direct labor standard rate	$	16	per hour
Standard hours allowed per case		0.75	direct labor hours
Fixed overhead budgeted	$	2,600	per month
Normal level of production		5,200	cases per month
Variable overhead application rate	$	1.50	per case
Fixed overhead application rate ($2,600 ÷ 5,200 cases)		0.50	per case
Total overhead application rate	$	2.00	per case

Required:

a. Compute the materials price and quantity variances.

b. Compute the labor rate and efficiency variances.

c. Compute the manufacturing overhead spending and volume variances.

d. Prepare the journal entries to:

1. Charge materials (at standard) to Work in Process.

2. Charge direct labor (at standard) to Work in Process.

3. Charge manufacturing overhead (at standard) to Work in Process.

4. Transfer the cost of the 5,000 cases of synthetic motor oil produced in May to Finished Goods.

5. Close any over- or underapplied overhead to cost of goods sold.

Answer 1

	a. Computation of Material Price and Quantity Variance
	1 Quarts=0.25 Gallon
	Standard Price of Direct Mateial (SP)	=	$1.30/Gallon
	Standard Quantity of Material required ( 5000*3.25)	=	16250 Gallon
	Actual Price of Direct Mateial (AP) ( $20365/16500)	=	$1.23/ Gallon
	Actual Quantity Purchased	=	16500 gallon
	Material Price Variance	=	1085 F
	( SP-AP)AQ, ( $1.30-$20365/16500)*16500 gallon
	Material Quantity Variance		$325 UF
	( SQ-AQ)SP, (16250-16500)gallon * $1.30
	b. Computation of Labour Rate and Efficiency Variance
	1 Quarts=0.25 Gallon
	Standard Rate of Labour/Hour (SR)	=	$16/Hour
	Standard Hours Required ( 5000*0.75)	=	3750 Hour
	Actual Rate of Labour/Hour (AR)	=	$15/Hour
	Actual Hour Utilised	=	3807 Hours
	Labour Rate Variance	=	$3807F
	( SR-AR)Actual Hour, ( $16-$15)*3807 Hour
	Labour Efficiency Variance		$912 UF
	( Standard Hours-Actual Hour)SR, (3750-3807)Hour * $16
	c. Computation of Manufacturing overhead and spending Volume Variance
	Overhead Spending Variance
	Standard Overhead Cost Allowed - Actual OH Cost incurred	=	985F
	(2600+(5000*1.50)-9115)
	Overhead Volume Variance=
	Standard Overhead Cost Allowed-Overhead cost Applied	=	100U
	(2600+(5000*1.50))-(5000*2)
D.Journal Entry
S. no.	Account		Debit	Credit
1	WIP Inventory ( at Standard Cost)		21125
	Material Quanity Variance ( Unfavourable)		325
	Material Price Variance ( Favourable)			1085
	Direct Material Inventory ( at Actual Cost)			20365
	( Being cost of Direct Material Chareged to production)
2	WIP Inventory ( at Standard Cost)		60000
	Labour Efficiency Variance ( Unfavourable)		912
	Labour Rate Variance ( Favourable)			3807
	Direct Labour ( at Actual Cost)			57105
	( Being cost of Direct Labour Charged to production)
3	WIP Inventory ( at Standard Cost)		10000
	Overhead Volume Variance		100
	Overhead Spending Variance ( Favourable)			985
	Manufacturing Overhead ( at Actual)			9115
	( being Applied OH to production)
4	Finished Goods Inventory (at Standard Cost)		91125
	WIP Inventory ( Standard Cost)			91125
	( Being transfer 5000 cases to Finshed Goods)
5	Overhead Spending Variance ( Favourable)		985
	Overhead Volume Variance (Un Faovourable)			100
	Cost of Goods Sold			885
	( Being Close Overhead variance to COGS)