In: Accounting
Flexible Budget, Standard Cost Variances, T-Accounts
Ingles Company manufactures external hard drives. At the beginning of the period, the following plans for production and costs were revealed:
Units to be produced and sold | 25,000 |
Standard cost per unit: | |
Direct materials | $ 10 |
Direct labor | 8 |
Variable overhead | 4 |
Fixed overhead | 3 |
Total unit cost | $ 25 |
During the year, 24,800 units were produced and sold. The following actual costs were incurred:
Direct materials | $264,368 | |
Direct labor | 204,352 | |
Variable overhead | 107,310 | |
Fixed overhead | 73,904 |
There were no beginning or ending inventories of direct materials. The direct materials price variance was $10,168 unfavorable. In producing the 24,800 units, a total of 12,772 hours were worked, 3 percent more hours than the standard allowed for the actual output. Overhead costs are applied to production using direct labor hours.
Required:
Instructions for parts 1 and 2: If a variance is zero, enter "0" and select "Not applicable" from the drop down box.
1. Prepare a performance report comparing expected costs to actual costs.
Ingles Company Performance Report |
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---|---|---|---|---|
Cost Items | Actual Costs | Budgeted Costs | Variance | Direction |
Direct materials | $ | $ | $ | Unfavorable |
Direct labor | Unfavorable | |||
Variable overhead | Unfavorable | |||
Fixed overhead | Favorable | |||
$ | $ | $ | Unfavorable |
Feedback
1. A flexible budget (1) provides expected costs for a variety of activity levels, or (2) provides budgeted costs for the actual level of activity.
2. Determine the following. If a variance amount is zero, enter "0" and select "Not applicable" from the drop-down list.
a. Direct materials usage variance
$ Unfavorable
b. Direct labor rate variance
$ Not applicable
c. Direct labor usage variance
$ Unfavorable
d. Fixed overhead spending and volume variances
Spending variance | $ | Favorable |
Volume variance | $ | Unfavorable |
e. Variable overhead spending and efficiency variances
Variable overhead spending variance | $ | Unfavorable |
Variable overhead efficiency variance | $ | Unfavorable |
Feedback
2.
a. MUV (Materials usage variance) = (AQ – SQ) x SP
b. LRV (Labor rate variance) = (AR – SR) x AH
c. LEV (Labor efficiency variance) = (AH – SH) x SR
d. Fixed OH spending variance = AFOH -BFOH
Volume variance = Budgeted fixed OH – Applied fixed OH
e. Variable overhead spending variance = (Actual variable OH rate
(AVOR) – (SVOR) Standard variable OH rate) x AH)
Variable overhead efficiency variance = (AH – SH) x SVOR
3. Use T-accounts to show the flow of costs through the system. In showing the flow, you do not need to show detailed overhead variances. Show only the over- and underapplied variances for fixed and variable overhead. Record the following transactions in the T-accounts: If an amount is zero, enter "0".
(a) purchase of materials,
(b) issuance of materials into production,
(c) incurrence of direct labor cost,
(d) application of variable overhead cost to production,
(e) application of fixed overhead cost to production,
(f) transfer of finished goods to finished goods inventory,
(g) sale of goods,
(h) closure of Direct Materials Price Variance account,
(i) closure of Direct Materials Usage Variance account,
(j) closure of Direct Labor Efficiency Variance account,
(k) closure of Variable Overhead Control account, and
(l) closure of Fixed Overhead Control account.
Enter these transactions in the T-accounts in the same order that they are presented here.
1.
Standard or Budgeted material cost for actual production = Standard material cost per unit x actual units produced= $ 10 x 24,800 = $ 248,000
Standard or Budgeted labor cost for actual production = Standard labor cost per unit x actual units produced
= $ 8 x 24,800 = $ 198,400
Budgeted Variable overhead cost for actual production = Standard overhead cost per unit x actual units produced
= $ 4 x 24,800 = $ 99,200
Budgeted Fixed overhead cost for 25,000 units = $ 3 x 25,000 = $ 75,000
Budgeted Fixed overhead cost for 24,800 = $ 75,000
Ingles Company |
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Performance Report |
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Cost Item |
Actual Costs |
Budgeted Cost |
Variance |
Direction |
Direct material |
$ 264,368 |
$ 248,000 |
$ 16,368 |
Unfavorable |
Direct labor |
$ 204,352 |
$ 198,400 |
$ 5,952 |
Unfavorable |
Variable overhead |
$ 107,310 |
$ 99,200 |
$ 8,110 |
Unfavorable |
Fixed overhead |
$ 73,904 |
$ 75,000 |
$ 1,096 |
Favorable |
$ 649,934 |
$ 620,600 |
$ 29,334 |
Unfavorable |
2.
a.
Direct materials price variance = $ 10,168 Unfavorable
(Actual price – Standard price) x Actual quantity = $ 10,168
$264,368 - Standard price x Actual quantity = $ 10,168
Standard price x Actual quantity = $264,368 - $ 10,168 = $ 254,200
Direct materials usage variance = (Actual Quantity – Standard Quantity) x Standard Price
= (Actual Quantity x Standard Price) – (Standard Quantity x Standard Price)
= $ 254,200 - $ 248,000 = $ 6,200 Unfavorable
b.
Actual labor hour worked for 24,800 units = 12,772
Actual labor hour worked per unit = 12,772/24,800 = 0.515 Hrs
Standard labor hours allowed for actual output (24,800 units) = 12,772 x (100% – 3%)
= 12,772 x 97 %
= 12,772 x 0.97 = 12,388.84 Hrs
Standard labor hours per unit = 12,388.84/24,800 = 0.49955 or 0.5 Hrs
Standard labor cost per unit = $ 8
Standard labor rate per hour = $ 8/0.49955 = $ 16
Direct labor rate Variance = (Actual rate - Standard rate) × Actual hour
= Actual rate x Actual hours – Standard rate x Actual hours
= $ 204,352 - $ 16 x 12,772 = $ 204,352 - $ 204,352
= $ 0 Not applicable
c.
Direct labor usages Variance = (Actual hours - Standard hours) x Standard rate
= (12,772 - 12,388.84) x $ 16.01441
= 383.16 x $ 16.01441
= $ 6,136.08 Unfavorable
****Answered first four sub parts.