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Horngren'S Financial And Managerial Accounting
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Short Answer

Computing and journalizing standard cost variances

Moss manufactures coffee mugs that it sells to other companies for customizing with their own logos. Moss prepares flexible budgets and uses a standard cost system to control manufacturing costs. The standard unit cost of a coffee mug is based on static budget volume of 59,800 coffee mugs per month:

Direct material (0.2 lbs. @$0.25 per lb)

$0.05

Direct Labor (3 minutes @ $0.11 per minute)

0.33

Manufacturing Overhead:

Variable (3 minutes @ $0.06 per minute)

$0.18

Fixed (3 minutes @ $0.13 per minute)

0.39

0.57

Total Cost per Coffee Mug

$0.95

Actual cost and production information for July 2018 follows:

a. There were no beginning or ending inventory balances. All expenditures were on account.

b. Actual production and sales were 62,500 coffee mugs.

c. Actual direct materials usage was 11,000 lbs. at an actual cost of $0.17 per lb.

d. Actual direct labor usage was 197,000 minutes at a total cost of $25,610.

e. Actual overhead cost was $10,835 variable and $29,765 fixed.

f. Selling and administrative costs were $95,000.

Requirements

1. Compute the cost and efficiency variances for direct materials and direct labor.

2. Journalize the purchase and usage of direct materials and the assignment of direct labor, including the related variances.

3. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances.

4. Journalize the actual manufacturing overhead and the allocated manufacturing overhead. Journalize the movement of all production costs from Work­-in­-Process Inventory. Journalize the adjusting of the Manufacturing Overhead account.

5. Moss intentionally hired more highly skilled workers during July. How did this decision affect the cost variances? Overall, was the decision wise?

  1. Material and labor variance:

Component

Cost variance

Efficiency variance

Direct Material

$880 (F)

$375(F)

Direct Labor

$3,940(U)

$1,235(U)

  1. Journal entry:

Transaction 1

It include entry made for the purchase of raw material.

Transaction 2

It include entry made for allocating raw material to work-in-process.

Transaction 3

It include entry made for allocating direct labor to work-in-process

  1. Overhead variance:

Variable overhead cost variance

$985(F)

Variable overhead efficiency variance

$570(U)

Fixed overhead cost variance

$6,443(F)

Fixed overhead volume variance

$1,053(U)

  1. The manufacturing overheads are adjusted by $4,405.
  2. Decision to hire high skilled laborers is not wise.
See the step by step solution

Step by Step Solution

Definition of Variance Analysis

The variance analysis is the financial metric calculated for controlling the business organization. Under this analysis, the business entity identifies the difference between estimated activity and the level of activity achieved.

Variance analysis

Direct material variance analysis:

Cost variance:

Efficiency variance:

Direct labor variance analysis:

Cost variance:

Efficiency variance:

Journal entry for material

Date

Accounts and Explanation

Debit $

Credit $

1 Transaction

Raw material inventory

$2,750

Direct material cost variance

$880

Account payable

$1,870

2 Transaction

Work-in-process inventory

$3,125

Direct material efficiency variance

$375

Raw material inventory

$2,750

3 Transaction

Work-in-process

$24,375

Direct labor efficiency variance

$1,235

Wages payable

$25,610

Overhead variance

Variable overhead cost variance:

Variable overhead efficiency variance:

Fixed overhead cost variance:

Particular

Amount $

Actual fixed overhead

$29,765

Less: Budgeted fixed overhead

(23,322)

Fixed overhead cost variance (unfavorable)

$6,443

Fixed overhead volume variance:

Particular

Amount $

Budgeted fixed overhead

$23,322

Less: Allocated fixed overhead

(24,375)

Fixed overhead volume variance (favorable)

$1,053

Journal entries

Date

Accounts and Explanation

Debit $

Credit $

Overhead incurred

Manufacturing overhead

$40,600

Various accounts

$40,600

Overhead allocated

Work-in-process inventory

$11,250

Manufacturing overhead

$11,250

Movement of production cost

Finished goods inventory

$38,750

Work-in-process inventory

$38,750

Cost of goods sold

$38,750

Finished goods inventory

$38,750

Adjusting of manufacturing overhead

Variable overhead efficiency variance

Fixed overhead cost variance

6,443

Fixed overhead volume variance

1,053

Manufacturing overhead

4,405

Variable overhead cost variance

985

Decision of hiring highly skilled workers

The decision to hire highly skilled labor is not wise because hiring skilled labor must make labor efficiency variance favorable, but the increase the labour cost that leads to high labour cost variance, which is already unfavorable, therefore it is not wise decision.

Most popular questions for Business-studies Textbooks

Preparing a financial budget—schedule of cash receipts, schedule of cash payments, cash budget

Beasley Company’s budget committee provides the following information:

December 31, 2017, account balances:

Cash $ 32,000 Accounts Receivable 19,000 Merchandise Inventory 16,000 Accounts Payable 15,000 Salaries and Commissions Payable 2,900 Budgeted amounts for 2018:

January February Sales, all on account $ 84,000 $ 84,400 Purchases, all on account 41,000 41,600 Commissions Expense 4,200 4,220 Salaries Expense 5,000 5,000 Rent Expense 2,200 2,200 Depreciation Expense 500 500 Insurance Expense 200 200 Income Tax Expense 1,900 1,900

Requirements

1. Prepare the schedule of cash receipts from customers for January and February 2018. Assume cash receipts are 80% in the month of the sale and 20% in the month following the sale.

2. Prepare the schedule of cash payments for purchases for January and February 2018. Assume purchases are paid 70% in the month of purchase and 30% in the month following the purchase.

3. Prepare the schedule of cash payments for selling and administrative expense for January and February 2018. Assume 25% of the accrual for Salaries and Commissions Payable is for commissions and 75% is for salaries. The December 31 balance will be paid in January. Salaries and commissions are paid 70% in the month incurred and 30% in the following month. Rent and income tax expenses are paid as incurred. Insurance expense is an expiration of the prepaid amount.

4. Prepare the cash budget for January and February. Assume no financing took place.

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