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 $20,716. It also incurred average direct labor costs of $14 per hour for the 4,003 hours worked in May by its production personnel. Manufacturing overhead for the month totaled $9,073, 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

Answer:-

a) Computation of Materials Price and Quantity Variances :

1. Direct Material Price Variance is the difference between the standard cost and the actual cost for the actual Quantity of Material purchased.

Actual rate = $20,716/16500 gallons

$ 1.255 rounded off to 2 deimals that is $ 1.26

Standard Rate = $1.30 Per Gallon

Material Price Variance = ( Standard rate - Actual Rate ) * Actual Quantity

( $ 1.30 - $ 1.26 ) * 16500 = $660 Favorable.

2. Materials Quantity Variance

The difference between the actual quantity at standard price and the standard cost is the direct materials quantity variance.

DM Quantity Variance = ( SQ ? AQ ) × SP

Standard Quantity = 3.25 gallons *5,000 = 16250 Gallons

Actual Quantity = 16,500 Gallons

Standard Price = $1.30

DM Quantity Variance = ( SQ ? AQ ) × SP

( 16250-16500)*1.30 = -$325 Unfavourable

b) Computation of labor rate and efficiency variances ;-

The labor rate variance is found by computing the difference between actual hours multiplied by the actual rate and the actual hours multiplied by the standard rate

Labour Rate Variance = A.R*A.H - AH*SR

= (4003 hours * $14) - ( 4003 hours* $ 16)

= 56042- 64048 = 8006 Favorable

2. Labour Effiecency Variance

The formula for the labor efficiency variance is:

(Actual hours - Standard hours) x Standard rate = Labor efficiency variance

Standard Hour For production of 5000 cases will be:

5000cases *0.75 hour per case= 3750 hours

Actual Hours = 4003

Standard Rate $ 16

The formula for the labor efficiency variance is:

(Actual hours - Standard hours) x Standard rate = Labor efficiency variance

( 4003 - 3750 ) X $16 = 4048 Unfavourable Variance