Question

Edney Company employs a standard cost system for product costing. The per-unit standard cost of its product is:

Raw materials	$	14.00
Direct labor (2 direct labor hours × $8.00 per hour)		16.00
Manufacturing overhead (2 direct labor hours × $10.00 per hour)		20.00
Total standard cost per unit	$	50.00

The manufacturing overhead rate is based on a normal capacity level of 600,000 direct labor hours. (Normal capacity is defined as the level of capacity needed to satisfy average customer demand over a period of two to four years. Operationally, this level of capacity would take into consideration sales trends and both seasonal and cyclical factors affecting demand.) The firm has the following annual manufacturing overhead budget:

Variable	$	3,665,000
Fixed		3,000,000
	$	6,665,000

Edney incurred $435,950 in direct labor cost for 54,800 direct labor hours to manufacture 26,000 units in November. Other costs incurred in November include $338,000 for fixed manufacturing overhead and $373,500 for variable manufacturing overhead.

Required:

1. Determine each of the following for November. [Note: Indicate whether each variance is favorable (F) or unfavorable (U).]

a. The variable overhead spending variance.

b. The variable overhead efficiency variance.

c. The fixed overhead spending (budget) variance.

d. The fixed overhead production volume variance.

e. The total amount of under- or overapplied manufacturing overhead (i.e., the total manufacturing overhead cost variance for the period).

2. Prepare the following four journal entries: (a) to record actual variable overhead costs, (b) to record actual fixed overhead costs, (c) to record standard overhead costs applied to production, and (d) to record all four overhead cost variances. The company uses a single account, Factory Overhead, to record all overhead costs. Assume that the actual variable manufacturing overhead consists of utilities payable of $171,500, indirect materials of $126,000 (all materials, direct and indirect, are recorded in a single account, Materials Inventory), and $76,000 depreciation on factory equipment (determined under the units-of-production method). Assume that the fixed manufacturing overhead consists of accrued (i.e, unpaid) salaries of $73,000 and factory depreciation of $265,000. All unpaid salaries should be recorded in a single account, Accrued Payroll.

3. Prepare the appropriate journal entry to close all manufacturing overhead variances to the cost of goods sold (CGS) account. (Assume the cost variances you calculated above are for the year, not the month.)

Answer 1

Part 1 A

variable overhead spending variance =Actual Cost -(SP x AQ) = 373500 – (6.11*54800) = 38672 U

SP = 3,665,000/600000 = 6.11

Part 1 B

variable overhead efficiency variance= SP * (AQ-SQ) = 6.11*(54800-52000) = 17108 U

SQ = 26000*2 = 52000

Part 1 C

fixed overhead spending (budget) variance =Actual Fixed manufacturing overhead –Budgeted Fixed manufacturing overhead = 338000-(3000000/12) = 88000 U

Part 1 D

fixed overhead production volume variance = Budgeted Fixed manufacturing overhead – Applied Fixed manufacturing overhead = (3000000/12)-(26000*2*(3000000/600000)) = 10000 F

Part 1 E

total amount of under- or overapplied manufacturing overhead = (373500+338000)-(317720+260000) = 133780 Underapplied

(6.11*52000) = 317720

26000*2*(3000000/600000))) = 260000

Part 2 journal entry

General journal	debit	credit
Variable Factory Overhead—Actual	373500
Utilities Payable, wages payable, etc.		373500
To record actual variable overhead costs for the period.
WIP Inventory (6.11*52000)	317720
Variable Factory Overhead—Applied		317720
To apply standard variable overhead costs to production
Variable Factory Overhead—Applied	317720
Variable Overhead Spending Variance	17108
Variable Overhead Efficiency Variance	38672
Variable Factory Overhead—Actual		373500
To record variable overhead variances for the period
Fixed Factory Overhead—Actual	338000
Salaries payable, accumulated depreciation, etc.		338000
To record actual fixed overhead costs for the period.
WIP Inventory	260000
Fixed Factory Overhead—Applied (26000*2*(3000000/600000)))		260000
To apply standard fixed overhead costs to production.
Fixed Factory Overhead—Applied	260000
Fixed Factory Overhead Spending Variance	88000
Production Volume Variance		10000
Fixed Factory Overhead—Actual		338000
To record fixed overhead variances for the period.

Part 3 closing journal entry

General journal	debit	Credit
Production Volume Variance	10000
Cost of Goods Sold (CGS)	133780
Variable Overhead Spending Variance		38672
Variable Overhead Efficiency Variance		17108
Fixed Overhead Spending Variance		88000