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PROBLEM ONE The Kitty Manufacturing Company uses a standard absorption costing job costing system. Manufacturing overhead...
PROBLEM ONE
The Kitty Manufacturing Company uses a standard absorption costing job costing system. Manufacturing overhead is allocated to products on the basis of standard direct labor hours. At the beginning of 20xx, Kitty adopted the following standards for its manufacturing costs:
Direct materials 3 lb. @ $5 per lb.
Direct labor 5 hr @ $10 per hour
Overhead:
Variable $5 per direct labor hour
Fixed $10 per direct labor hour
The denominator level for total manufacturing overhead per month in 20xx is 40,000 direct labor hours.
Kitty’s expected level of sales is 6,000 units at $190 each. Kitty’s flexible budget for March 20xx was based on this denominator level.
The records for March indicated the following:
- Direct materials purchased 25,000 lb at $5.20 per pound
- Direct materials used 23,100 lb
- Direct labor 40,100 hours @ $14.60 per hour
- Total overhead $600,000 (1/2 is variable; the remainder is fixed)
- Actual production 7,800 units
- Units sold 5,000 units at $200 per unit
REQUIRED:
- Journalize the above transactions for March.
- For March, determine all eight production variances.
- Calculate the 3-way overhead variances and the 2-way overhead variances.
- Assuming the contribution margin format, prepare pro forma income statements (an actual income statement, flexible budget income statement, and a static budget income statement.)
- Calculate the sales price and sales volume variances.
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Expert Solution
| Cost card | ||||||||
| Particulars | Standard cost for actual production | Particulars | Actual cost | |||||
| Quantity & hour | Rate($/lb & $/hr) | Amount | Quantity & hour | Rate($/lb & $/hr) | Amount | |||
| Direct Material | 23400.00 | 5.00 | $ 117,000 | Material purchased | 25,000.00 | 5.20 | $ 130,000.00 | |
| (7,800 unit * 3 lb) | Material used | 23,100.00 | 5.20 | $ 120,120.00 | ||||
| Closing material | 1,900.00 | $ 9,880.00 | ||||||
| Direct labour | 39000.00 | 10.00 | $ 390,000 | Direct labour | 40,100.00 | 14.60 | $ 585,460.00 | |
| (7,800 unit * 5 hr) | ||||||||
| Variable overhead | 39000.00 | 5.00 | $ 195,000 | Variable overhead | 40,100.00 | 7.48 | $ 300,000.00 | |
| Fixed overhead | 40000.00 | 10.00 | $ 400,000 | Fixed overhead | $ 300,000.00 | |||
| Total Standard manufacturing cost | $ 1,102,000 | |||||||
| Budgeted unit | (40000 hr/5 hr) | 8,000 | ||||||
| Actual unit | 7,800 |
| Computation of variances: | |||||
| 1 | Material Price variance = (Standard rate - Actual rate) * Actual quantity purchase | ||||
| Material Price variance = ($5 - $5.2) X 25000 lb = $-5000 (Unfavourable) | |||||
| 2 | Material efficiency variance = (Standard Quantity - Actual Quantity used) * Standard rate | ||||
| Material efficiency variance = (23400 lb - 23100 lb ) X $5 = $1500 (Favourable) | |||||
| 3 | Labor Rate variance = (Standard rate - Actual rate) * Actual hours | ||||
| Labor Rate variance = ($10/hr - $14.6/hr) X 40100 hr = $-184460 (Unfavourable) | |||||
| 4 | Labor efficiency variance = (Standard Hours - Actual Hours) * Standard rate | ||||
| Labor efficiency variance = (39000 hr - 40100 hr) X $10/hr = $-11000 (Unfavourable) | |||||
| 5 | Variable Overhead rate variance = (Standard rate - Actual rate) * Actual hour used | ||||
| Variable Overhead rate variance = ($5/hr - $7.48129675810474/hr) X 40100 hr = $-99500 (Unfavourable) | |||||
| 6 | Variable overhead efficiency variance = (Standard hour - Actual hour) * Standard rate | ||||
| Variable overhead efficiency variance = (39000 hr - 40100 hr) X $5/hr = $-5500 (Unfavourable) | |||||
| 7 | Fixed Overhead Budget variance = (Actual Fixed overhead - Budgeted Fixed overhead | ||||
| Fixed Overhead Budget variance = ($300000 - $400000) = $100000 (Favourable) | |||||
| 8 | Fixed overhead Volume variance = (Actual output - Budgeted output) * Budgeted Overhead rate | ||||
| Fixed overhead Volume variance = (7800 unit - 8000 unit ) X ($400000 / 8000 unit ) = $-10000 (Unfavourable) | |||||
| 9 | Sale Price Variance= (Actual Price- Budgeted price)* Actual Sales | ||
| Sale Price Variance= ($200 - $190)* 5000 units = $50,000(Favorable) | |||
| 10 | Sale Volume Variance= (Actual Sales unit- Budgeted sales unit)* Budgeted Sales price | ||
| Sale Volume Variance= (5000 unit- 6000 unit)* $190 = $190,000 |
| Accounts and Explaination | Debit $ | Credit $ | |
| 1 | Material Inventory | $ 125,000 | |
| Material Price variance | $ 5,000 | ||
| Accounts payable | $ 130,000 | ||
| (To record purchase of material) | |||
| 2 | WIP Inventory | $ 117,000 | |
| Material efficiency variance | $ 1,500 | ||
| Material Inventory | $ 115,500 | ||
| (To record usage of material) | |||
| 3 | WIP Inventory | $ 390,000 | |
| Labor Rate variance | $ 184,460 | ||
| Labor efficiency variance | $ 11,000 | ||
| Wage Payable | $ 585,460 | ||
| (To record direct labour cost) |
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