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 $20,011. It also incurred average direct labor costs of $13 per hour for the 3,935 hours worked in May by its production personnel. Manufacturing overhead for the month totaled $9,116, 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. 1. Material price variance= (Standard price-Actual price) x Actual quantity = (1.30-1.21)*16,500 = 1,485. It is a favourable variance as the actual price per gallon is less than the standard price per gallon.

Actual price is derived by dividing total cost incurred on materials by Actual quantity. (20,011 by 16,500)

2. Material quantity variance = (Standard quantity-Actual quantity) x Standard price = (16,250-16,500)*1.30 = (325)

b. 1. Labour rate variance= (Standard rate-Actual rate) x Actual hours paid for = (16-13)*3,935 = 11805

It is a favourable variance as the actual rate paid for 1 hour is less than the standard rate per hour.

2. Labour efficiency variance= (Standard hours- Actual hours worked) x Standard rate = (3,750-3,935)*16 = ($ 2960)

This is an unfavourable variance as the actual hours worked is more than the standard hours required for the job.

3. Manufacturing Overhead Spending variance = (Std Variable OH + Budg Fxd OH)-Actual OH =(7,500+2,200)-9,116 = 584

(Std Variable OH + Budg Fxd OH)-Actual OH =(7,500+2,600)-9,739 = 361