Question

Unit Costs, Multiple Products, Variance Analysis, Journal Entries

Business Specialty, Inc., manufactures two staplers: small and regular. The standard quantities of direct labor and direct materials per unit for the year are as follows:

	Small	Regular
Direct materials (oz.)	6.0	10.00
Direct labor (hrs.)	0.1	0.15

The standard price paid per pound of direct materials is $1.60. The standard rate for labor is $8.00. Overhead is applied on the basis of direct labor hours. A plantwide rate is used. Budgeted overhead for the year is as follows:

Budgeted fixed overhead	$360,000
Budgeted variable overhead	480,000

The company expects to work 12,000 direct labor hours during the year; standard overhead rates are computed using this activity level. For every small stapler produced, the company produces two regular staplers.

    Actual operating data for the year are as follows:

Units produced: small staplers, 35,000; regular staplers, 70,000.

Direct materials purchased and used: 56,000 pounds at $1.55—13,000 for the small stapler and 43,000 for the regular stapler. There were no beginning or ending direct materials inventories.

Direct labor: 14,800 hours—3,600 hours for the small stapler and 11,200 hours for the regular stapler. Total cost of direct labor: $114,700.

Variable overhead: $607,500.

Fixed overhead: $350,000.

Required:

1. Prepare a standard cost sheet showing the unit cost for each product. Round standard usage amounts to three decimal places if rounding is required. Round other answers to the nearest cent.

Business Specialty, Inc.
Standard Cost Sheet
Small staplers
	Standard Price	Standard Usage	Standard Cost
Direct materials	$		$
Direct labor
Fixed overhead
Variable overhead
Unit cost			$

Feedback

1. An example of a standard Cost Sheet is shown on Exhibit 9.2. Each product has its own cost sheet.

Business Specialty, Inc.
Standard Cost Sheet
Regular staplers
	Standard Price	Standard Usage	Standard Cost
Direct materials	$
Direct labor
Fixed overhead
Variable overhead
Unit cost			$

Feedback

1. An example of a standard Cost Sheet is shown on Exhibit 9.2. Each product has its own cost sheet.

2. Compute the direct materials price and usage variances for each product.

MPV	$	Favorable
MUV (Small)	$	Favorable
MUV (Regular)	$	Favorable

Feedback

2. As a general rule, in a standard costing system, all inventories are carried at standard. Actual costs are never entered into inventory. If necessary, refer to the textbook for the appropriate formulas.

Prepare journal entries to record direct materials activity. If an amount box does not require an entry, leave it blank.

1.	Materials
	Direct Materials Price Variance
	Accounts Payable
	Materials purchase
2.	Work in Process
	Direct Materials Usage Variance
	Materials
	Materials usage
3.	Direct Materials Price Variance
	Direct Materials Usage Variance
	Cost of Goods Sold
	Close materials variances to Cost of goods sold

Feedback

2. As a general rule, in a standard costing system, all inventories are carried at standard. Actual costs are never entered into inventory. If necessary, refer to the textbook for the appropriate formulas.

3. Compute the direct labor rate and efficiency variances for each product.

LRV	$
LEV (Small)	$
LEV (Regular)	$

Feedback

3. If necessary, refer to the textbook for the appropriate formulas.

Prepare journal entries to record direct labor activity. If required, round to the nearest dollar. If an amount box does not require an entry, leave it blank.

1.
	Record labor
2.
	Close labor variances

Feedback

3. If necessary, refer to the textbook for the appropriate formulas.

4. Compute the variances for fixed and variable overhead.

Fixed Overhead Spending Variance	$
Fixed Overhead Volume Variance	$
Variable Overhead Spending Variance	$
Variable Overhead Efficiency Variance	$

Feedback

4. If necessary, refer to the textbook for the appropriate formulas.

Prepare journal entries to record overhead activity. All variances are closed to Cost of Goods Sold. For compound entries, if an amount box does not require an entry, leave it blank.

1.
	Apply variable overhead
2.
	Apply fixed overhead
3.
	Actual variable overhead
4.
	Actual fixed overhead
5.
	Record fixed and variable overhead variances
6.
	Close variable overhead variances
7.
	Close fixed overhead variances

Feedback

4. If necessary, refer to the textbook for the appropriate formulas.

5. Assume that you know only the total direct materials used for both products and the total direct labor hours used for both products. Compute the total direct materials and direct labor usage variances.

MUV	$
LEV	$

Feedback

5. If necessary, refer to the textbook for the appropriate formulas.

Feedback

Partially correct

Answer 1

1) Unit cost for each product

Compoutation of Unit Cost for Small Stapler
Business Specialty Inc.
Standard Cost Sheet
Small Staplers
	Standard Price	Standard Usage	Standard Cost
Direct materials	$1.60	6	$9.60
Direct labor	$8.00	0.1	$0.80
Fixed Overhead (Refer Note 1)	$30.00	0.1	$3.00
Variable Overhead (Refer note 1)	$40.00	0.1	$4.00
Unit Cost			17.4

Note 1 --

Fixed Overheads are distributed by applying a plantwide overhead rate.

Plant wide overhead rate for Fixed Overhead = Budgeted Fixed Overhead / Budgeted direct labor hours

= 360,000 / 12,000 hrs= $30per Hour

Variable Overhead Rate is also calculated by using Budgeted Variable Overhead divided by Budgeted direct labor hours

= 480,000 / 12,000 hrs= $40 Per Hour

Computation of Unit Cost for Regular Staplers
Business Specialty Inc.
Standard Cost Sheet
Regular Staplers
	Standard Price	Standard Usage	Standard Cost
Direct materials	$1.60	10	$16.00
Direct labor	$8.00	0.15	$1.20
Fixed Overhead (360,000 / 12,000 * 0.1)	$30.00	0.15	$4.50
Variable Overhead (480,000/12000*0.1)	$40.00	0.15	$6.00
Unit Cost			27.7

2.

Computation of Material Price Variance
Material Price Variance
Standard Price Per Pound	1.6
Actual Price per Pound	1.55
Difference in Price	0.05
Actual Quantity Purchased	56,000
Price Variance	2,800	Favorable
(Difference in Price x Actual Quantity Purchased)		(Because actual price is lower than standard price)

Computation of Material Usage Variance
Material Usage Variance:	Small Stapler	Regular Stamper
Actual Quantity Used	13,000	43,000
Standard Quantity allowed for actual production	13,125	43,750
(Refer note 2)
Variation in quantity used	125	750
Standard Price Per Pound	1.6	1.6
Material Usage Variance	$200	$1,200
	Favorable	Favorable

Note 2 --- Standard Quantity allowed for actual production
	Small Stapler	Regular Stamper
Actual Units Produced	35,000	70,000
Standard Quantity required per unit	6 ozs	10 ozs
Standard Quantity Allowed for actual production (in ozs)	210,000	700,000
Standard Quantity Allowed for actual production (in Pounds) (1 Pound = 16 Ozs)	13,125	43,750

Journal Entry
1) Material Purchase
Account Titles	Debit	Credit
Material (56,000*$1.6)	$89,600
Accounts Payable (56,000*1.55)		$86,800
Material Price variance		$2,800
2) Material Usage Variance
Account Titles	Debit	Credit
Work In Process (13,125+43,750)*1.6	$91,000
Materials (56000*1.6)		$89,600
Material Usage variance		$1,400
3) entry to close materials variance to COGS
Account Titles	Debit	Credit
Material Price Variance	$2,800
Material Usage Variance	$1,400
Cost of Goods Sold		$4,200