Question

Question 1

Part 1

Chapman Inc. sells a single product, Zud, which has a budgeted selling price of $39 per unit and a budgeted variable cost of $27 per unit. Budgeted fixed costs for the year amount to $52,500. Actual sales volume for the year (62,000 units) fell 10,500 units short of budgeted sales volume. Actual fixed costs were $53,500. With everything else held constant, what impact did the shortfall in volume have on profitability for the year? (Indicate whether the effect was favorable or unfavorable in terms of its effect on operating income.)

Part 2

Actual purchase price per pound of direct materials	$	8.80
Standard direct materials allowed for units of product T produced		3,400	pounds
Decrease in direct materials inventory		230	pounds
Direct materials used in production		3,600	pounds
Standard price per pound of material	$	8.55

Required:

1. What was Steinberg’s direct materials purchase-price variance and its direct materials usage variance for March? Indicate whether each variance was favorable (F) or unfavorable (U).

2. Prepare the appropriate journal entries for March.

What was Steinberg’s direct materials purchase-price variance and its direct materials usage variance for March? Indicate whether each variance was favorable (F) or unfavorable (U). (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)

Answer 1

1.

Change in sales =10,500 (given in question) reduction in volume

Difference between selling price and cost $39 -$27 per unit $12 per unit.

Change (increase) in fixed cost $1000 ($53,500 -52,500 )

Change in profit will be (10,500) ×12 + $1000

$126,000 + $1000

$127,000.

Change is negative as there is reduction operating profit due to reduction in sale volume.

ALTERNATIVELY

Full method

Budgeted    actual

Sales $2,827,500*   $2,418,000 (journal 1)

Variable ($1,957,500)** ($1,674,000).

Costs ( refer journal 2 )

Fixed costs ( $52,500)    ($53,500)   

Operating profit $817500 $690500

Difference between $817500 - $690500

$1,27,000 decrease in operating profit due to reduction of sales volume.

*sales 72500 × $39 per unit = 2,82,7500.

**variable costs 72500 ×27 per unit = $1,957,500.

2.

Formula :

Direct Material Purchase Price Variance :

Actual quantity purchased × ( Standard Price - Actual Price )

3370* ×( 8.55 - 8.80 )

3370* × (-0.25)

(8425)

8425 unfavorable

* 3600 pounds used in production with 230 decreases in inventory. Using following  equation

Material used = decrease in inventory + Purchase ( for purchase there will be negative value the equation is based on Cost of goods sold = Opening inventory + purchase - closing inventory

3600 = 230 + purchase

Purchase will 3370 units

Direct Material usage variance :

Standard price × (standard usage - actual usage ).

$8.55 ×( 3400 -3600)

$8.55 ×(-200)

-1710

1710 unfavorable variance.

3.

Journal Entry

1. Sales / Revenue

Cash/ bank A/C DR. $2,418,000.

To Sales A/C $2,418,000.

(Being sales of 62000 pounds @$39 per pounds )

2. Recording of Variable costs and fixed costs

Variable costs A/C DR. $1,674,000.

Fixed costs A/C DR. $53,500

To Cash / Bank A/C $1,725,000.

(Being recording of variable costs including cost of direct material for 62,000 pounds at $27 per pounds and fixed costs of $53,500).