Question

 

Patel and Sons Inc. uses a standard cost system to apply factory overhead costs to units produced. Practical capacity for the plant is defined as 50,000 machine hours per year, which represents 25,000 units of output. Annual budgeted fixed factory overhead costs are $250,000 and the budgeted variable factory overhead cost rate is $4 per unit. Factory overhead costs are applied on the basis of standard machine hours allowed for units produced. Budgeted and actual output for the year was 20,000 units, which took 41,000 machine hours. Actual fixed factory overhead costs for the year amounted to $245,000, while the actual variable overhead cost per unit was $3.90.

Based on the information provided above, provide an appropriate end-of-year closing entry for each of the following two independent situations: (a) the net factory overhead cost variance is closed entirely to Cost of Goods Sold (CSG), and (b) the net factory overhead variance is allocated among WIP Inventory, Finished Goods Inventory, and CGS using the following percentages: 10%, 20%, and 70%, respectively. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Record the net variance closed to cost of goods sold.

Record the net variance allocated to ending inventories and Cost of goods sold.

Answer 1

Standard time for producing one unit of output = 50000hour / 25000 unit = 2 hours per unit of output

Budgeted Fixed Overhead = $250000

Budgeted overhead absorption rate per hour = $2,50,000 / 50000 hours = $5 per hour.

Budgeted units produced during the year was 20000 units. Standard hours for 20000 units = 2 hour unit x 20000 = 40000hours .

in 40000 standard hours 20000unit will make

Total Fixed Overhead Variance = standard hours allowed for actual production x standard overhead absorption rate per hour - Actual Fixed overhead cost incurred

40000 hrs. x $5 per hour - $2,45000 = $45000 (U).

Standard Variable Overhead rate = $4 per unit.

Variable Overhead Variance = Actual output x Standard rate per unit - Actual variable overhead

20000units x $ 4. per unit – 20000 units x $3.9 per unit = 2000 (F).

Total Overhead Variance = Total Fixed Overhead Variance + Total Variable Overhead Variance = $45000 (U) + $2000 (F) = $43000(U).

B-

When flexible budget will be prepared for actual production of 20000 units, the fixed expense will remain same as the budget i.e. $250000

Flexible overhead budget total for actual output of 20000 units = $2,50000 + 20000 x $4

$330000

Actual overhead expense = $245000+ 20000 x $3.9 = $323000

Total Flexible budget variance = $33000 -$ 323000 = $7000(f).

Production Volume Variance

Budgeted Hours - Standard Hours required for actual production) x Standard overhead rate per hour = (50000 hrs – 20000 units x 2 hrs /unit) x $5/hr = $50000