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Question 1 Cannes Inc. produces and sells a single product. The company uses standard costing for...

Question 1

Cannes Inc. produces and sells a single product. The company uses standard costing for accounting purposes. The standard cost for the product is as follows:

Standard Cost Data

Standard Cost Per Unit

Direct material

2 metres at $6.45 per metre

$12.90

Direct labour

1.4

DLH at $12 per DLH

$16.80

Variable overhead

1.4

DLH at $2.50 per DLH

$3.50

Fixed overhead

1.4

DLH at $6 per DLH

$8.40

$41.60

For the year just completed, the company manufactured 30,000 units of products during the year. 1,000 of the 30,000 units produced did not pass inspection at the end of the manufacturing process. However, the production manager decided to consider this as normal spoilage and included the costs as part of cost of good units produced. A total of 64,000 metre of material was purchased during the year at a cost of $6.55 per metre. All of this material was used to manufacture the 30,000 units. There is no beginning or ending inventories for the year. The company worked 43,500 direct labour hours (“DLH”) during the year at a direct labour cost of $11.80 per hour. Overhead is applied to products based on DLH. The data relating to manufacturing overhead costs is as follows:

Budgeted activity level

35,000 units

Budgeted fixed overhead costs

$294,000

Actual variable overhead costs incurred

$108,000

Actual fixed overhead costs incurred

$311,800

Cannes Inc. has the policy of paying its staff a bonus if they meet the budgeted sales or cost targets. Cost targets are defined as cost variances that are within 5.0% of standard costs for the year.

At the year-end meeting, the production manager was eager to claim that the overall manufacturing cost variance is only 4.8% of the standard cost of products manufactured during the year, and that his staff should be in line for a bonus this year. The CEO, however, disagrees. By the CEO’s computation, summation of all manufacturing cost variances works out to be 8.1% of the total standard cost of products manufactured.

Required:

  1. Based on 30,000 units produced, compute the material price and quantity variances for the year.

  1. Based on 30,000 units produced, compute the labour rate and efficiency variances for the year.

  1. Based on 30,000 units produced, compute (i) the variable manufacturing overhead spending and efficiency variances; and (ii) the fixed overhead budget and volume variances for the year.

  1. Write journal entries to record all direct material, direct labour, and factory overhead variances for Cannes Inc. during the year (narrations are not required).

  1. Explain, by showing clear computations, how the production manager and CEO came up with their respective cost variance percentages of 4.8% and 8.1%. In addition, explain (with clear supporting computations) if you recommend that bonuses be paid for achievement of cost targets at Cannes Inc. this year.

Solutions

Expert Solution

Question a. Material Price and Quantity Variances

The formula for calculating Material Price variance is (Actual Price (AP)- Standard price (SP)) * Actual Quantity (AQ)

In the question above,

AP= $6.55

SP= $6.45

AQ= 64,000

Hence Material Price Variance ($6.55-$6.45)*64,000 which is equal to = $6,400 (Adverse)

Formula for Material quantity variance = (AQ- Standard Quantity for actual production(SQ))*SP

In this question

AQ= 64,000

SQ= 30,000*2=60,000

SP=$6.45

Hence Material Quantity Variance (64,000-60,000 )*6.45 which is equal to = $25,800 (Adverse)

Question B Labour rate and efficiency variances

Formula for Labour Rate Efficiency Variance = (Actual Rate (AR)- Standard Rate (SR))* Actual Labour Hours (AH)

In this question:

AR=$11.80 per labour hour

SR=$12 per labour hour

AH= 43,500

Hence Labour Rate Variance = ($11.80-$12)*43,500= $8,700 (Favourable)

The formula for Labour efficiency variance =(AH- Standard hours for Actual output (SH))*SR

In this question

AH=43,500

SH= 30,000*1.4=42,000

SR=$12

Hence Labour efficiency variance= (43,500-42,000)*12= $18,000 (Adverse)

Question C Based on 30,000 units produced, compute (i) the variable manufacturing overhead spending and efficiency variances; and (ii) the fixed overhead budget and volume variances for the year.

Variable Overhead (Variable OH)

Actual Variable OH= 108,000

Actual Labour Hours= 43,500

Actual Rate of OH Per Labour Hour= 108,000/43,500= $2.482759

Standard Rate of OH per labour hour= $2.50

Variable OH rate variance formula = (Actual Rate of OH Per Labour Hour-Standard Rate of OH per labour hour)* Actual Labour hours

Substituting for values Variable OH rate variance formula = ($2.482759-$2.50)*43500= $750 (Favourable)

Actual Labour Hours = 43,500

Standard Labour hours for actual output= 30000*1.4= 42,000

Standard rate for Variable OH per labour hour= $2.50

Variable OH Efficiency variance= (Actual Labour Hours-Standard Labour hours for actual output)*Standard rate for Variable OH per labour hour

Substituting values  Variable OH Efficiency variance= (43,500-42,000)*$2.50= $3,750 (Adverse)

Fixed Overheads (Fixed OH) variance

Fixed OH Budget variance (aka Fixed OH Spend variance) = Actual Fixed OH- Budget fixed OH

Actual Fixed OH= $311,800

Budget fixed OH= 35,000 (Budgeted units)* $8.40 (Standard rate per unit budgeted)= $294,000

Hence Fixed OH Budget variance = $311,800- $294,000= $17,800 (Adverse)

Fixed Overhead volume variance = Budget fixed OH- Standard Fixed OH applied

Budgeted fixed OH= $294,000

Standard Fixed OH applied = (Standard Rate* Standard input for actual output) = $8.40* 30,000= 252,000

Hence Fixed Overhead volume variance = $294,000-$252,000= $42,000 (Adverse)

Question D Journal entries

Variance Accounts DR $ CR $
Material Price Variance Dr. Raw material Inventory (64,000*6.45) 412,800
Dr. Raw Material Price variance (Adverse) 6,400
Cr. Accounts Payable (64,000*6.55) 419,200
Material Qty variance Dr. Work in Progress (60,000*$6.45) 387,000
Dr. Material Volume variance (Adverse) 25,800
Cr. Raw material inventory 412,800
Labour variance Dr. Work in progress (1.4*12*30,000) 504,000
Dr. Labour efficiency variance 18,000
Cr. Labour rate variance (Favourable) 8,700
Cr. Wages payable 513,300
OH Variances
Dr Fixed OH (Actual $) 311,800
Dr Variable OH (Actual $) 108,000
Cr. Various accounts (like Rent salary etc.) 419,800
Dr. WIP (OH applied at Std rate and qty) 357,000
Cr. Fixed OH (1.4* 6*30,000) 252,000
Cr. Variable OH (1.4*30,000*2.5) 105,000

At this stage the total under applied variance is $62,800 of which $3,000 is representing Variable OH and $59,800 represent Fixed OH. These need to be moved to Cost of goods sold. These are in turn split as:

Under-applied Variable OH $
Variable OH Efficiency variance (Adverse) 3,750
Variable OH Rate variance (Favourable) (750)
Total Variable OH Under-applied 3,000
Under-applied Fixed OH $
Fixed OH Budget variance 17,800
Fixed OH Volume variance 42,000
Total Variable OH Under-applied 59,800

Question E

Explain, by showing clear computations, how the production manager and CEO came up with their respective cost variance percentages of 4.8% and 8.1%. In addition, explain (with clear supporting computations) if you recommend that bonuses be paid for achievement of cost targets at Cannes Inc. this year.

Standard cost per unit=41.60

Total standard cost =30,000*41.60 = $1,248,000

Actual Cost incurred

Actual Cost $
Material (64,000*$6.55) 419,200
Labour (43,500*$11.8) 513,300
Variable OH 108,000
Fixed OH 311,800
Total 1,352,300

Production Manager calculation

Total Cost = 1,352,300

Less Fixed OH Variance =59,800

Cost (excluding Fixed OH variance)= 1,292,500

Variance to Budget =4%

MD Calculation

Total Cost= 1,352,300

Budget=1,248,000

Variance to budget =8%

In terms of budget, it makes sense to consider all cost in terms of determining bonus. Hence no bonus is required to be paid for the year.


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