Question - Four-Variance Analysis
Background - Able Control Company, which manufactures electrical switches, uses a standard cost system and carries all inventory at standard cost. The standard factory overhead cost per switch is based on DLHs.
Problem Information -
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Variable overhead
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5 hours at
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$8.00/hour
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$40.00
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Fixed overhead*
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5 hours at
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$12.00/hour
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$60.00
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Total standard overhead cost per unit produced
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$100.00
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* Based on a practical capacity of 300,000 DLHs per month.
The production manager argued during the last performance review that the company should use a more up-to-date base for charging factory overhead costs to production. She commented that her factory had been highly automated in the last two years and, as a result, now has hardly any labor. The factory hires only highly skilled workers to set up production runs and to do periodic adjustments of machinery whenever the need arises.
Requirements -
1. Compute the following for Able Control Company:
a. The fixed overhead spending variance for October.
b. The factory overhead production-volume variance for October.
c. The variable overhead spending variance for October.
d. The variable overhead efficiency variance for October.
2. Comment on the implications of the variances and suggest any action that the firm should take to improve its operations.
Question 2 - Journal Entries in a Standard Cost System
Background - Boron Chemical Company produces a synthetic resin that is used in the automotive industry. The company uses a standard cost system. For each gallon of output, the following direct manufacturing costs are anticipated:
Problem Information -
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Output standards:
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Hours
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Wage Rate
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Total/Unit
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Direct labor
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2
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$25.00
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$50.00
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Gals.
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Cost/Gal.
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Total/Unit
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DM
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2
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$10.00
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$20.00
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Actual Results, December 2007:
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Gallons of output produced
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2,500
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DLHs worked
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4,900
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Actual wage rate (average)
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$19.50
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DM purchases (gallons)
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6,000
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Act. DM cost/gallon purchased
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$10.45
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Gals. Issued to production
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5,100
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Units (gallons) sold
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2,000
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Selling price per unit (gal.)
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$150.00
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The company's practice is to record the price variance for materials at point of purchased.
Requirements - Give journal entries for the following events and transactions:
1. Purchase, on credit, of direct materials.
2. Direct materials issued to production.
3. Direct labor cost of units completed this period
4. Direct manufacturing cost (direct labor plus direct materials) of units completed and transferred to Finished Goods Inventory.
5. Sale, for $150 per gallon, of 2,000 gallons of output. (Hint: you will need two journal entries here.)