Question

Redlands, Inc. reported standard and actual costs for the product that it manufactures:

Item	Standard	Actual
Direct materials quantity	2 lbs.	4 lbs.
Direct material price	$3 per lb.	$2 per lb.
Direct labor quantity	3 hours	2 hours
Direct labor price	$5	$7
Factory overhead	$1 per machine hour	$2 per machine hour
Total machine hours	10 machine hours	18 machine hours
Number of finished products made	10	12
Number of finished products sold	10	11
Sales price per unit	$40	$40

Required: Compute the following items:
Standard product cost
Forecast income statement through gross profit
Actual product cost
Direct materials quantity, price, and total variances
Direct labor quantity, price, and total variances
Factory overhead quantity, price, and total variances
Actual cost of goods manufactured statement
Actual cost of goods sold (assume no beginning inventory)
Actual income statement through gross profit

Answer 1

1. Standard Product Cost:$ 22

Direct Materials ( 2 lbs. x $ 3 per lb. )	$ 6
Direct Labor ( 3 hrs x $ 5 per hour )	15
Factory Overhead	1
Standard Product Cost	$ 22

2.

Budgeted Income Statement
Sales ( 10 units x $ 40 per unit )	$ 400
Less: Cost of Goods Sold ( 10 units x $ 22 per unit )	(220)
Budgeted Gross Profit	$ 180

3. Actual Product Cost: $ 25

Direct Materials	$ 8
Direct Labor	14
Factory Overhead ( 18 machine hours / 12 units * $ 2)	3
Actual Product Cost	$ 25

4. Computation of Variances:

a. Direct materials quantity variance = ( Standard quantity allowed for actual output - Actual quantity used ) x Standard price per lb. = ( 12 x 2 - 12 x 4 ) x $ 3 = $ 72 U

Direct materials price variance = ( Standard price - Actual price ) x Actual Quantity = $ ( 3 - 2 ) x 48 lbs = $ 48 F

Direct materials total variance = $ 72 U + $ 48 F = $ 24 U

b. Direct labor quantity variance = ( 12 x 3 hours - 24 hours ) x $ 5 = $ 60 F

Direct labor price variance = $ ( 5 - 7 ) x 24 hours = $ 48 U

Direct labor total variance = $ 60 F + $ 48 U = $ 12 F

c, Factory overhead quantity variance = ( 12 hrs - 18 hrs ) x $ 1 = $ 6 U

Factory overhead price variance = $ ( 1 - 2 ) x 18 hrs = $ 18 U

Factory overhead total variance = $ 6 U + $ 18 U = $ 24 U

5.

Statement of Cost of Goods Manufactured
Beginning Work in Process	$ 0
Direct Materials	96
Direct Labor	168
Factory Overhead	36
Cost of Goods Manufactured	$ 300

6.

Statement of Cost of Goods Sold
Beginning Finished Goods Inventory	$ 0
Cost of Goods Manufactured	300
Cost of Goods Available for Sale	300
Less: Ending Finished Goods Inventory ( $ 300 / 12 * 1)	( 25)
Cost of Goods Sold	$ 275

7.

Income Statement ( Actual )
Sales	$ 440
Less: Cost of Goods Sold	275
Gross Profit	$ 165