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 $21,005. It also incurred average direct labor costs of $13 per hour for the 4,007 hours worked in May by its production personnel. Manufacturing overhead for the month totaled $9,271, 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

a.
Compute the materials price and quantity variances. (Indicate the effect of each variance by selecting "F" for favourable, "U" for unfavourable, and "None" for no effect (i.e., zero variance). Negative amounts should be indicated by a minus sign. Omit the "$" sign in your response.)
Materials price variance = Actual quantity used × (Standard price – Actual price)
Actual price per pound = $21005 ÷ 16,500 gallons =	$1.27	Per Gallon
Materials price variance = 16,500 gallons × ($1.30 – $1.27)	$445.00	Favorable
Materials quantity variance = Standard price × (Standard quantity – Actual quantity)
Standard quantity allowed = 5,000 cases × 3.25 gallons/case	16,250
Materials quantity variance = $1.30 per gallon × (16,250 gallons – 16,500 gallons)	-$325.00	Unfavorable
b.
Compute the labor rate and efficiency variances. (Indicate the effect of each variance by selecting "F" for favourable, "U" for unfavourable, and "None" for no effect (i.e., zero variance). Negative amounts should be indicated by a minus sign. Omit the "$" sign in your response.)
Labor rate variance = Actual labor hours × (Standard rate – Actual rate)
Labor rate variance = 4,007 hours × ($16 – $13)	$12,021.00	Favorable
Labor efficiency variance = Standard hourly rate × (Standard hours – Actual hours)
Standard hours allowed = 5,000 cases × 0.75 hours/case =	3750	Hours
Labor efficiency variance = $16 per hour × (3,750 hours – 4,007 hours)	-$4,112.00	Unfavorable
c.
Compute the manufacturing overhead spending and volume variances. (Indicate the effect of each variance by selecting "F" for favourable, "U" for unfavourable, and "None" for no effect (i.e., zero variance). Omit the "$" sign in your response.)
Overhead spending variance
Overhead Spending = Actual fixed overhead - Budgeted fixed overhead
Standard variable overhead allowed = $1.50/case × 5,000 cases	7500
Fixed Overhead Spending = $2200 - $2600	-$400.00	Favorable
Variable Overhead Spending = 7071 - 7500	-$429.00	Favorable
Total	-$829.00	Favorable
Overhead volume variance = Standard variable overhead allowed - Overhead cost applied
Fixed Volume Variance = 2600 - 0	$2,600.00
Variable Volume variance = 7500 - 10000	-$2,500.00
Total	$100.00	Unfavorable