Question

Patel and Sons Inc. uses a standard cost system to apply factory overhead costs to units produced. Practical capacity for the plant is defined as 50,000 machine hours per year, which represents 25,000 units of output. Annual budgeted fixed factory overhead costs are $250,000 and the budgeted variable factory overhead cost rate is $4 per unit. Factory overhead costs are applied on the basis of standard machine hours allowed for units produced. Budgeted and actual output for the year was 20,000 units, which took 41,000 machine hours. Actual fixed factory overhead costs for the year amounted to $245,000, while the actual variable overhead cost per unit was $3.90.

Based on the information provided above, prepare the appropriate journal entries to record: (a) actual factory overhead costs for the year, (b) the applied factory overhead costs for the year (both variable and fixed), and (c) the total flexible-budget variance and the production volume variance for the period. Assume that the company uses a single account, Factory Overhead, to record both actual and applied factory overhead. Also, assume that the only variable overhead cost was electricity and that actual fixed overhead consisted of depreciation of $150,000 and supervisory salaries of $95,000. Finally, assume that both electricity expense and the supervisory salaries expense have been incurred but not yet paid (i.e., both are current liabilities). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Journal Entries

• 1

  Record the actual overhead costs

• 2

  Record the overhead costs applied to production

• 3

  Record the overhead variances using a two-variance approach.

Answer 1

Answer:

Answer-a:
Account Title	Debit ($)	Credit ($)
Factory overhead ($245,000 + 20,000 x $3.90)	323,000
Accumulated depreciation-Factory		150,000
Salaries payable		95,000
Utilities payable (elctricity-variable OH)		78,000
Answer-b:
Account Title	Debit ($)	Credit ($)
Work in process inventory	280,000
Factory overhead (20,000 x 2 hrs x $7)		280,000
Fixed OH rate + Variable OH rate = $5 + ($4/2) = $7

Answer-c:

When flexible budget will be prepared for actual production of 20,000 units, the fixed

expense will remain same as the budget i.e. $250,000.

Flexible overhead budget total for actual output of 20,000 units = $250,000 + (20,000 x $4) = $330,000

Actual overhead expense = $245,000 + (20,000 x $3.90) = $323,000.

Total Flexible budget variance = $330,000 - $323,000 = 7,000 F

Production Volume Variance =

(Budgeted Hours - Standard Hours required for actual production) x Standard overhead rate

(50,000 - 20,000 units x 2 hrs) x $5 = 50,000 U