Cost accounting-variance analysis


Problem:

Production volume has grown steadily for the past several years, as the following schedule of production labor indicates:

This Year

32,000 Hours

1 Year Ago

30,000 Hours

2 Years Ago

27,000 Hours

3 Years Ago

28,000 Hours

4 Years Ago

26,000 Hours

The company has developed standard costs for its several products.  It sets standard costs for each year in the preceding October. 

The standard cost of a sprinkler this year was $4.00, computed as follows:

Direct materials

 

 

       Aluminum

0.2 pound x $0.40 per pound

$0.08

       Plastic

1.0 pound x $0.38 pound

$0.38

Production Labor

0.3 hour x $9.00 per hour

$2.70

Overhead*

 

 

       Variable

0.3 hour x $1.60 per hour

0.48

       Fixed

0.3 hour x $1.20 per hour

0.36

TOTAL

 

$4.00

*Calculated using 30,000 production labor-hours as normal capacity

During February of this year, 8,500 good sprinklers were manufactured.  The following costs were incurred and charged to production.

Materials requisitioned for production

 

 

       Aluminum

1,900 pounds x $0.40 per pound

   $760

       Plastic: Regular

6,000 pounds x $0.38 pound

  2,280

                    Low Grade

3,500 pounds x $0.38 per pound

  1,330

Production Labor

 

 

       Straight Time

2,300 hours x $10.00 per hour

23,000

       Overtime

400 hours x $15.00 per hour

  6,000

Overhead

 

 

       Variable

$5,200

 

       Fixed

3,100

  8,300

Costs charged to production

 

$41,670

Materials price variations are not charged to production but to materials price variation account at the time the invoice is entered.  All materials are carried in inventory at standard prices.  Materials purchases for February follow:

       Aluminum

1,800 pounds x $0.48 per pound

   $864

       Plastic:

 

 

       Plastic: Regular

3,000 pounds x $0.50 pound

  1,500

                    Low Grade

6,000 pounds x $0.29 per pound

  1,740


Plastic shortages forced the company to purchase lower-grade plastic than called for in the standards, which increased the number of sprinklers rejected on inspection.

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Accounting Basics: Cost accounting-variance analysis
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