Question

Problem 10B-6 Transaction Analysis; Income Statement Preparation [LO10-1, LO10-2, LO10-3, LO10-4, LO10-5] Phoenix Company manufactures only one product and uses a standard cost system. The company uses a plantwide predetermined overhead rate that relies on direct labor-hours as the allocation base. The predetermined overhead rate is based on a cost formula that estimated $2,880,000 of fixed and variable manufacturing overhead for an estimated allocation base of 240,000 direct labor-hours. Phoenix does not maintain any beginning or ending work in process inventory. The company’s beginning balance sheet is as follows: Phoenix Company Balance Sheet 1/1/XX (dollars in thousands) Assets Cash $ 1,200 Raw materials inventory 300 Finished goods inventory 540 All other assets 12,000 Total assets $ 14,040 Liabilities and Equity Retained earnings $ 14,040 Total liabilities and equity $ 14,040 The company’s standard cost card for its only product is as follows: Inputs (1) Standard Quantity or Hours (2) Standard Price or Rate Standard Cost (1) × (2) Direct materials 3 pounds $ 25.00 per pound $ 75.00 Direct labor 2.00 hours $ 16.00 per hour 32.00 Variable manufacturing overhead 2.00 hours $ 2.00 per hour 4.00 Fixed manufacturing overhead 2.00 hours $ 10.00 per hour 20.00 Total standard cost per unit $ 131.00 During the year Phoenix completed the following transactions: Purchased (with cash) 460,000 pounds of raw material at a price of $26.50 per pound. Added 430,000 pounds of raw material to work in process to produce 125,000 units. Assigned direct labor costs to work in process. The direct laborers (who were paid in cash) worked 265,000 hours at an average cost of $15.00 per hour to manufacture 125,000 units. Applied variable manufacturing overhead to work in process inventory using the variable portion of the predetermined overhead rate multiplied by the number of direct labor-hours allowed to manufacture 125,000 units. Actual variable manufacturing overhead costs for the year (all paid in cash) were $480,000. Applied fixed manufacturing overhead to work in process inventory using the fixed portion of the predetermined overhead rate multiplied by the number of direct labor-hours allowed to manufacture 125,000 units. Actual fixed manufacturing overhead costs for the year were $2,450,000. Of this total, $1,300,000 related to items such as insurance, utilities, and salaried indirect laborers that were all paid in cash and $1,150,000 related to depreciation of equipment. Transferred 125,000 units from work in process to finished goods. Sold (for cash) 123,000 units to customers at a price of $175 per unit. Transferred the standard cost associated with the 123,000 units sold from finished goods to cost of goods sold. Paid $3,300,000 of selling and administrative expenses. Closed all standard cost variances to cost of goods sold. Required: 1. Compute all direct materials, direct labor, variable overhead, and fixed overhead variances for the year. 2. Record transactions a through j for Phoenix Company. 3. Compute the ending balances for Phoenix Company’s balance sheet. 4. Prepare Phoenix Company’s income statement for the year.

Answer 1

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Material Variance

Labor Variance

Overhead Variance

Standard Material Price

$             25.00

Standard Hour Rate

$       16.00

Standard Hour Rate

$         2.00

Standard Quantity

125000*3

375000

Standard Hour

125000*2

250000

Standard Hour

125000*2

250000

Actual Quantity

460000

Actual Hours

265000

Actual Hours

265000

Actual Quantity used

430000

Actual Matrial Price

$             26.50

Actual Hour Rate

$       15.00

Actual Hour Rate

480000/265000

$         1.81

Material Price Variance

AQ(AP-SP)

Labor Rate Variance

AH(AR-SR)

Overhead Rate Variance

AH(AR-SR)

460000*(26.5-25)

265000*(15-16)

265000*(1.81-2)

$                           690,000

Unfavorable

$                 -265,000

Favorable

$                 -50,350

Favorable

Material Quantity Variance

SP(AQ-SQ)

Labor Efficiency Variance

SR(AH-SH)

Overhead Efficiency Variance

SR(AH-SH)

25*(430000-375000)

16*(265000-250000)

2*(265000-250000)

$                        1,375,000

Unfavorable

$                  240,000

Unfavorable

$                  30,000

Unfavorable

Actual Cost Incurred

$      2,450,000

a

Raw Material Inventory

Static Budget

240000*10

$      2,400,000

b

Debit

Credit

Budgeted Input For Actual Output*Budgeted Rate

125000*2*10

$      2,500,000

c

Beginning

$                300,000

b

$11,395,000

a

$          12,190,000

Spending Variance

a-b

$           50,000

U

Production Volume Variance

b-c

$         100,000

F

Ending

$             1,095,000

Date

Account

Debit

Credit

Finished Goods Inventory

Debit

Credit

a

Raw Material Inventory

$                      12,190,000

Beginning

$                540,000

h

$18,076,080

Cash

$    12,190,000

f

$          18,370,000

b

Work in Process Inventory

$                      11,395,000

Ending

$                833,920

Raw Material Inventory

$    11,395,000

Cash

c

Work in Process Inventory

$                        3,975,000

Debit

Credit

Cash

$      3,975,000

Beginning

$             1,200,000

a

$17,465,000

g

$          21,525,000

d

Work in Process Inventory

$                           500,000

Factory Overhead (125000*2*2)

$         500,000

Ending

$             5,260,000

e

Work in Process Inventory

$                        2,500,000

Work in process Inventory

Factory Overhead (125000*2*10)

$      2,500,000

Debit

Credit

b

$          11,395,000

f

$18,370,000

f

Factory Overhead

$                        2,450,000

c

$             3,975,000

Cash

$      1,300,000

d

$                500,000

Accumulated Depreciation

$      1,150,000

e

$             2,500,000

f

Finished Goods Inventory

$                      18,370,000

Factory Overhead

Work in Process Inventory

$    18,370,000

Debit

Credit

f

$             2,450,000

d

$     500,000

g

Cash

$                      21,525,000

Cost of Goods Sold

$                550,000

e

$ 2,500,000

Sales Revenue

$    21,525,000

Ending

$                -

h

Cost of Goods Sold (18370000*123000/125000)

$                      18,076,080

Finished Goods Inventory

$    18,076,080

i

Selling and Administrative Expense

$                        3,300,000

Cash

$      3,300,000

Cost of Goods Sold:

Beginning, Finished Goods

$         540,000

Cost of Goods Manufactured:

Direct Material, Beginning

$                           300,000

Add: Purchase

$                      12,190,000

Less: Direct Material, Ending

$                        1,095,000

Direct Material Cost

$                      11,395,000

Direct Labor

$                        3,975,000

Overhead-Applied

$                        3,000,000

Cost of Goods Manufactured:

$    18,370,000

Cost of Goods Available

$    18,910,000

Less: Finished Goods, Ending

$         833,920

Cost of Goods Sold

$    18,076,080

Income Statement:

Sales Revenue

$    21,525,000

Less: Cost of Goods Sold

$    18,076,080

Add: Overapplied Overhead

$         550,000

Gross Margin

$      3,998,920

less: Selling and Admin

$      3,300,000

Operating Income

$         698,920