Question

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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, provide an appropriate end-of-year closing entry for each of the following two independent situations: (a) the net factory overhead cost variance is closed entirely to Cost of Goods Sold (CSG), and (b) the net factory overhead variance is allocated among WIP Inventory, Finished Goods Inventory, and CGS using the following percentages: 10%, 20%, and 70%, respectively. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

• 1

  Record the net variance closed to cost of goods sold.

• 2

  Record the net variance allocated to ending inventories and Cost of goods sold.

Answer 1

No.	Account Titles and Explanation	Debit	Credit
1	Cost of goods sold	43000
	Factory overhead variance		43000
	(To close the net overhead variance)
2	WIP Inventory (10% x $43000)	4300
	Finished Goods (20% x $43000)	8600
	Cost of goods sold (70% x $43000)	30100
	Factory overhead variance		43000
	(To close the net overhead variance)

Working:

Fixed overhead rate = $250000/50000 machine hours = $5 per machine hour

Fixed overhead variance = Actual fixed overheads - Applied fixed overheads

Applied fixed overheads = Standard machine hours for actual output x Fixed overhead rate = (20000 x 50000/25000) x $5 = 40000 x $5 = $200000

Fixed overhead variance = $245000 - $200000 = $45000 Unfavorable

Variable overhead variance = Actual variable overheads - Applied variable overheads

Actual variable overheads = 20000 x $3.90 = $78000

Applied variable overheads = 20000 x $4 = $80000

Variable overhead variance = $78000 - $80000 = $2000 Favorable

Net variance = $45000 Unfavorable + $2000 Favorable = $43000 Unfavorable