Question

Question 2 Variance analysis for Divine Denim

Helen has been using a standard cost system developed by Good Numbers and calculates the standard cost of a completed pair of RTW jeans as $72.00, as follows:

	Quantity	Price $	Unit	Cost per pair of jeans $
Denim fabric meters	2	10	/metre	20.00
Direct labour hours	2	20	/hour	40.00
Variable factory overhead	0.4	10	/hour	4.00
Fixed factory overhead	0.4	20	/hour	8.00
Total standard cost				72.00

The fixed overhead rate is based on an estimated 600 units per month. Direct labour is nearly a fixed cost in this business. Selling and administrative costs are $4500 per month plus $2 per pair of jeans sold. The following information is for production during April:

		Units
Number of pairs of jeans made	565	Jeans
Purchase of 1200 metres of denim	13,200	metres
Number of metres used	1,150	metres
Direct labour costs (1200 hours)	24,500	$
Variable factory overhead costs	2,750	$
Fixed factory overhead costs	4,020	$
Selling and administrative costs	3,770	$

Divine Denim’s policy is to record materials price variances at the time materials are purchased. Use a spreadsheet to perform calculations.

Required:

As an accountant working for Good Numbers use a spreadsheet to:

1. prepare a flexible cost budget for the month of April.
2. calculate all common direct cost variances.
3. calculate all common factory overhead variances.
4. calculate a total variance for the selling and administrative costs.
5. prepare a production cost variance report for April.
6. prepare a report that sums all the variances necessary to prepare the reconciling journal entry at the end of the period. Explain how you would close the total variance; that is, identify the account or accounts that would be affected, and whether expenses in the accounts will be increased or decreased to adjust the records for the total variance.
7. use information in the April production cost variance report (part v. above) to identify and describe questions Helen, the owner of Devine Denim, might have about April’s production costs.

Answer 1