Question

In: Accounting

Umbrella Corp produces engine parts for large aircraft. The company uses a standard cost system for...

Umbrella Corp produces engine parts for large aircraft. The company uses a standard cost system for production costing and control. The standard cost sheet for one of its higher volume products (a valve) is as follows:

-Direct materials (7 lbs. @ $5.40) $37.80

- Direct labor (1.75 hrs. @ $18) 31.50

- Variable overhead (1.75 hrs. @ $4.00) 7.00

- Fixed overhead (1.75 hrs. @ $3.00) 5.25

- Standard unit cost $81.55

During the year, Umbrella had the following activity related to valve production:

a. Production of valves totaled 20,600 units.

b. A total of 135,400 pounds of direct materials was purchased at $5.36 per pound.

c. There were 10,000 pounds of direct materials in beginning inventory (carried at $5.40 per pound).

There was no ending inventory.

d. The company used 36,500 direct labor hours at a total cost of $656,270.

e. Actual ﬁxed overhead totaled $110,000.

f. Actual variable overhead totaled $168,000.

Umbrella produces all of its valves in a single plant. Normal activity is 20,000 units per year. Standard overhead rates are computed based on normal activity measured in standard direct labor hours.

Required:

1. Compute the direct materials price and usage variances.

2. Compute the direct labor rate and efﬁciency variances.

3. Assume that the purchasing agent for the valve plant purchased a lower-quality direct material from a new supplier. Would you recommend that the company continue to use this cheaper direct material? If so, what standards would likely need revision to reﬂect this decision? Assume that the end product’s quality is not signiﬁcantly affected.

4. Prepare all possible journal entries for direct materials and direct labor costs.

Note: please provide your answers and explanations on spreadsheet or Word format.

Expert Solution

Answer :

(1). Direct material price variance = Actual quantity ( Standard rate - Actual rate)

135,400 (5.40 - 5.36)

= $5,416 Favorable

Direct materials usage variance = Standard rate (Standard quantity - Actual quantity) Standard quantity

= 20,600 units x 7 lbs

= 144,200

Actual quantity = Beginning inventory + Purchases - Ending inventory

= 10,000 + 135400 - 0

= 145,400 lbs

5.40 (144,200 - 145,400)

= $6,480 Adverse

(2). Direct labor rate variance = Actual direct labor hours (Standard rate - Actual rate) Actual rate

= $656,270 / 36,500

= $17.98

36,500 (18 - 17.98)

= $730 Favorable

Direct labor efficiency variance = Standard rate (Standard hours - Actual hours) Standard hours

= 20,600 units x 1.75 hours

= 36,050 hours

18 (36,050 - 36,500)

= $900 Favorable

(3). Company has to discontinue the purchase of the inferior direct materials, as it costs the company more. The budgeted cost of direct materials at 20,600 units production level is

($5.40 * 7 * 20,600)

= $778,680

Actual Cost was

($725,744 + $54,000)

=$779,744

After the detailed analysis the cost over run was caused by large, unfavorable usage variance, probably attributable to the lower quality of direct materials.

(4). Preparing all possible Journal entries by assuming a Four - variance analysis of overhead variances

General Journal	Debit	Credit
Materials	$731,160
Direct material price variance		$5,416
Accounts payable		$725,744

Work in process	$778,680
Direct material variance usage variance	$6,480
Materials		$785,160

Work in process	$648,900
Direct labor efficiency variance	$8,100
Direct labor rate variance		$730
Wages payable		$656,270

Cost of goods sold	$13,850
Direct labor rate variance	$730
Direct labor usage variance		$6,480
Direct labor efficiency variance		$8,100

Direct materials price variance	$5,416
Cost of goods sold		$5,416

Variable overhead control	$168,000
Miscellaneous accounts		$168,000

Fixed overhead control	$110,000
Miscellaneous accounts		$110,000

Work in process	$144,200
Variable overhead control		$144,200

Work in process	$108,150
Fixed overhead control		$108,150

Variable overhead spending variance	$22,000
Variable overhead efficiency variance	$1,800
Fixed overhead spending variance	$5,000
Fixed overhead volume variance		$3,150
Fixed overhead control		$1,850
Variable overhead control		$23,800

Cost of goods sold	$28,800
Variable overhead efficiency variance		$1,800
Fixed overhead spending variance		$5,000
Variable overhead spending variance		$22,000

Fixed overhead volume variance	$3,150
Cost of goods sold		$3,150

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