Question

Simpson Manufacturing has the following standard cost sheet for one of its products: TotalDirect materials5 pounds at $2 per pound$10 Direct labor2 hours at $25 per hour 50 Variable factory overhead2 hours at $5 per hour 10 Fixed factory overhead2 hours at $20 per hour 40 Cost per unit $110 The company uses a standard cost system and applies factory overhead cost based on direct labor hours and determines the factory overhead rate based on a practical capacity of 400 units of the product. Simpson has the following actual operating results for the year just completed: Units manufactured376 Direct materials purchased and used1,880pounds $20,680 Direct labor incurred830hours 22,410 Variable factory overhead incurred 5,312 Fixed factory overhead incurred 15,800 Before closing the periodic accounts, the (standard cost) entries in selected accounts follow: AccountDebit (total) Credit (total)Work-in-process inventory$177,000 $142,640 Finished goods inventory 142,640 119,690 Cost of goods sold 119,690

Required:

1. Determine for the period the following items:a. Flexible budget for variable factory overhead cost based on output for the period.b. Total variable overhead cost applied to production during the period.c. Total budgeted fixed factory overhead cost.d. Total fixed factory overhead cost applied to production during the period.

2. Compute the following factory overhead cost variances using a four-variance analysis:a. Total variable overhead cost variance.b. Variable overhead spending variance.c. Variable overhead efficiency variance.d. Total underapplied or overapplied variable overhead.e. Fixed overhead spending variance.f. Fixed overhead production volume variance.g. Total fixed overhead cost variance.h. Total underapplied or overapplied fixed overhead.

3. Compute the following factory overhead cost variances using three-variance analysis:a. Overhead spending variance.b. Overhead efficiency variance.c. Fixed overhead production volume variance.

4. Compute the total overhead flexible-budget variance and the fixed overhead production volume variance using a two-variance analysis.

5. Using a single overhead account (e.g., Factory Overhead), make proper journal entries for:a. Incurrence of factory overhead costs.b. Application of factory overhead costs to production.c. Identification of overhead variances assuming that the firm uses the four-variance analysis identified in requirement 2.d. Close all factory overhead cost items and their variances of the period if:(1) The firm closes all variances to the Cost of Goods Sold account.(2) The firm prorates variances to the inventory accounts and the Cost of Goods Sold account.

Answer 1

	Cost card
	Particulars	Standard cost for actual production	Particulars	Actual cost
	Quantity & hour	Rate($/lb & $/hr)	Amount	Quantity & hour	Rate($/lb & $/hr)	Amount
	Direct Material	1880.00	2.00	$                  3,760	Material purchased	1,880.00	11.00	$                   20,680.00
		(376 unit * 5 pound)			Material used	1,880.00	11.00	$                   20,680.00
					Closing material	-		$                                  -
	Direct labour	752.00	25.00	$               18,800	Direct labour	830.00	27.00	$                   22,410.00
		(376 unit * 2 hr)
	Variable overhead	752.00	5.00	$                  3,760	Variable overhead	830.00	6.40	$                     5,312.00
	Fixed overhead	800.00	20.00	$               16,000	Fixed overhead			$                   15,800.00
	Total Standard manufacturing cost	$               42,320
		Budgeted unit		400
		Actual unit		376
	Computation of variances:
1	Material Price variance = (Standard rate - Actual rate) * Actual quantity purchase
	Material Price variance = ($2 - $11) X 1880 pound = $-16920 (Unfavourable)
2	Material efficiency variance = (Standard Quantity - Actual Quantity used) * Standard rate
	Material efficiency variance = (1880 pound - 1880 pound ) X $2 = $0 (Favourable)
3	Labor Rate variance = (Standard rate - Actual rate) * Actual hours
	Labor Rate variance = ($25/hr - $27/hr) X 830 hr = $-1660 (Unfavourable)
4	Labor Time variance = (Standard Hours - Actual Hours) * Standard rate
	Labor Time variance = (752 hr - 830 hr) X $25/hr = $-1950 (Unfavourable)
5	Variable Overhead rate variance = (Standard rate - Actual rate) * Actual hour used
	Variable Overhead Spending variance = ($5/hr - $6.4/hr) X 830 hr = $-1162 (Unfavourable)
6	Variable overhead efficiency variance = (Standard hour - Actual hour) * Standard rate
	Variable overhead efficiency variance = (752 hr - 830 hr) X $5/hr = $-390 (Unfavourable)
7	Fixed Overhead Budget variance = (Actual Fixed overhead - Budgeted Fixed overhead
	Fixed Overhead Spending variance = ($15800 - $16000) = $200 (Favourable)
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