Concept explainers
Concept introduction:
Elastic (flexible) overhead
Requirement 1:
Monthly overhead forecast to
Cost per unit for each variable overhead item and its total per unit costs
Fixed cost per month.
Answer to Problem 3PSB
Cost per unit for variable overhead item and total per unit cost is as follows.
Cost item variable overhead | Cost per unit$ |
Material (indirect) | 1.50 |
Labour (indirect) | 6 |
Power | 1.50 |
Maintenance and repair | 3 |
Total overhead cost per unit | $12 |
Total fixed cost per month should be as follows,
Particulars | Amount $ |
Total fixed cost per month | $180000 |
Explanation of Solution
Cost per unit for variable overhead item and total per unit cost is as follows.
Cost item variable overhead | Total cost(TC) | The volume of production expected | Cost per unit$ |
Material (indirect) | 22500 | 15000 | 1.50 |
Labour (indirect) | 90000 | 15000 | 6 |
Power | 22500 | 15000 | 1.50 |
Maintenance and repair | 45000 | 15000 | 3 |
Total overhead cost per unit | $12 |
Total fixed cost per month should be as follows,
Overhead cost per item fixed | Amount $ |
Depreciation-building | 24000 |
Depreciation-machinery | 72000 |
Insurance and taxes | 18000 |
Supervision | 66000 |
Total | $180000 |
Concept introduction:
Elastic (flexible) overhead forecast:An elastic (flexible) forecast is a forecast that adjusts or flexes with changes in quantity or action. They remain unaffected from the amounts recognized at the time that the standing forecast was organized and accepted
Requirement 2:
To explain:
Flexible overhead forecast for December depicting the amount of each variable and fixed cost that is 65%, 75% and 85% level of capacity.
Answer to Problem 3PSB
Flexible forecast overhead for December.
Particulars | Unit sales forecasted for 13000 | Unit sales forecasted for 15000 | Unit sales forecasted for 17000 |
Variable cost total | 156000 | 180000 | 204000 |
Total fixed cost | 180000 | 180000 | 180000 |
Total overhead | $336000 | $360000 | $384000 |
Explanation of Solution
Flexible forecast overhead for December.
Flexible | Flexible | flexible | |||
Per unit amount variable | Total Fixed cost | Unit sales forecasted for 13000 | Unit sales forecasted for 15000 | Unit sales forecasted for 17000 | |
Overhead cost variable | |||||
Material indirect | 1.50 | 19500 | 22500 | 25500 | |
Labour indirect | 6 | 78000 | 90000 | 102000 | |
Power | 1.50 | 19500 | 22500 | 25500 | |
Maintenance and repair | 3 | 39000 | 45000 | 51000 | |
Variable cost total | 12 | 156000 | 180000 | 204000 | |
Overhead fixed | |||||
Depreciation-building | 24000 | 24000 | 24000 | 24000 | |
Depreciation-machinery | 72000 | 72000 | 72000 | 72000 | |
Insurance and taxes | 18000 | 18000 | 18000 | 18000 | |
Supervision | 66000 | 66000 | 66000 | 66000 | |
Total fixed cost | 180000 | 180000 | 180000 | 180000 | |
Total overhead | $336000 | $360000 | $384000 |
Concept introduction:
Elastic (flexible) overhead forecast:An elastic (flexible) forecast is a forecast that adjusts or flexes with changes in quantity or action. They remain unaffected from the amounts recognized at the time that the standing forecast was organized and accepted
Requirement 3:
Computation of direct material cost variance, and also quantity and price variance.
Answer to Problem 3PSB
Direct material cost variance is$15900U, price variance is $ 6900U and quantity variance $9000U
Explanation of Solution
Computation as follows,
Actual material used | 69000 lbs(given) |
For actual production standard quantity of material | 15000 units*4.5lb/unit=67500lb |
Actual price | 6.10/lb given |
Standard price | 6 /lb given |
Direct material cost variance
Actual unit at actual cost(69000lbs @ 6.10) | 420900 |
Standard units at |
405000 |
Direct material cost variance | $15900U |
Direct material price variance
Price variance | = | AQ*(AP-SP) |
= | 69000*(6.10-6) | |
= | 69000*.10 | |
= | $ 6900U |
Direct material quantity variance
Quantity variance | = | SP*(AQ-SQ) |
= | 6*(69000-67500) | |
= | 1500*6 | |
= | $9000U |
Concept introduction:
Elastic (flexible) overhead forecast:An elastic (flexible) forecast is a forecast that adjusts or flexes with changes in quantity or action. They remain unaffected from the amounts recognized at the time that the standing forecast was organized and accepted
Requirement 4:
Computing direct labour cost variance and also rate and efficiency variance.
Answer to Problem 3PSB
Direct labour cost variance is$10440U, efficiency variance $3600U
And rate variance is $6840U
Explanation of Solution
Computation of actual labour hours used, standard labour hours for actual production, actual labour rate and standard labour rate.
Actual hours used | 22800hrs given |
Standard hours for actual | 15000 units*1.5hrs/unit=22500hrs |
Actual rate | 12.30/hr |
Standard rate | 12/hrs |
Computation of direct labor cost variance
Actual hours at actual cost(22800hrs*12.30) | 280440 |
Standard hours at standard cost(22500hrs*12) | 270000 |
Direct labour cost variance | $10440U |
Computation of direct labour rate variance
Rate variance | = | Actual hrs*(Actual rate −standard rate) |
= | 22800*(12.30-12) | |
= | 22800*.30/hrs | |
= | $6840U |
Computation labour efficiency variance
Efficiency variance | = | Standard rate*(Actual hours-standard hours) |
= | (22800-22500) hours*12 | |
= | 300*12 | |
= | $3600U |
Concept introduction:
Elastic (flexible) overhead forecast:An elastic (flexible) forecast is a forecast that adjusts or flexes with changes in quantity or action. They remain unaffected from the amounts recognized at the time that the standing forecast was organized and accepted
Requirement 5:
Detailed overhead variance report that shows the variance for individual item of overhead.
Answer to Problem 3PSB
Controllable variance | Forecast | Results | ||
Overhead cost-variable | ||||
Material-indirect | 22500 | 21600 | 900 | F |
Labour-indirect | 90000 | 82260 | 7740 | F |
Power | 22500 | 23100 | 600 | U |
Maintenance & Repair | 45000 | 46800 | 1800 | U |
Variable cost total | 180000 | 173760 | 6240 | F |
Overhead cost-fixed | ||||
Depreciation building | 24000 | 24000 | 0 | |
Depreciation machinery | 72000 | 75000 | 3000 | U |
Insurance & taxes | 18000 | 16500 | 1500 | F |
Supervision | 66000 | 66000 | 0 | |
Total fixed cost | 180000 | 181500 | 1500 | U |
Overhead cost total | $360000 | $355260 | $4740 | F |
Explanation of Solution
Overhead variance report
S company | |||||
Overhead variance report | |||||
For 31st December | |||||
Volume variance | |||||
Production level expected | 75% of capacity | ||||
Achieved production level | 75% of capacity | ||||
Volume variance | 0 | ||||
Flexible | Actual | ||||
Controllable variance | Forecast | Results | Variances | ||
Overhead cost-variable | |||||
Material-indirect | 22500 | 21600 | 900 | F | |
Labour-indirect | 90000 | 82260 | 7740 | F | |
Power | 22500 | 23100 | 600 | U | |
Maintenance & Repair | 45000 | 46800 | 1800 | U | |
Variable cost total | 180000 | 173760 | 6240 | F | |
Overhead cost-fixed | |||||
Depreciation building | 24000 | 24000 | 0 | ||
Depreciation machinery | 72000 | 75000 | 3000 | U | |
Insurance & taxes | 18000 | 16500 | 1500 | F | |
Supervision | 66000 | 66000 | 0 | ||
Total fixed cost | 180000 | 181500 | 1500 | U | |
Overhead cost total | $360000 | $355260 | $4740 | F |
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Chapter 8 Solutions
MANAGERIAL ACCOUNTING FUND. W/CONNECT
- Business Specialty, Inc., manufactures two staplers: small and regular. The standard quantities of direct labor and direct materials per unit for the year are as follows: The standard price paid per pound of direct materials is 1.60. The standard rate for labor is 8.00. Overhead is applied on the basis of direct labor hours. A plantwide rate is used. Budgeted overhead for the year is as follows: The company expects to work 12,000 direct labor hours during the year; standard overhead rates are computed using this activity level. For every small stapler produced, the company produces two regular staplers. Actual operating data for the year are as follows: a. Units produced: small staplers, 35,000; regular staplers, 70,000. b. Direct materials purchased and used: 56,000 pounds at 1.5513,000 for the small stapler and 43,000 for the regular stapler. There were no beginning or ending direct materials inventories. c. Direct labor: 14,800 hours3,600 hours for the small stapler and 11,200 hours for the regular stapler. Total cost of direct labor: 114,700. d. Variable overhead: 607,500. e. Fixed overhead: 350,000. Required: 1. Prepare a standard cost sheet showing the unit cost for each product. 2. Compute the direct materials price and usage variances for each product. Prepare journal entries to record direct materials activity. 3. Compute the direct labor rate and efficiency variances for each product. Prepare journal entries to record direct labor activity. 4. Compute the variances for fixed and variable overhead. Prepare journal entries to record overhead activity. All variances are closed to Cost of Goods Sold. 5. Assume that you know only the total direct materials used for both products and the total direct labor hours used for both products. Can you compute the total direct materials and direct labor usage variances? Explain.arrow_forwardThe cost accountant for River Rock Beverage Co. estimated that total factory overhead cost for the Blending Department for the coming fiscal year beginning February 1 would be 3,150,000, and total direct labor costs would be 1,800,000. During February, the actual direct labor cost totalled 160,000, and factory overhead cost incurred totaled 283,900. a. What is the predetermined factory overhead rate based on direct labor cost? b. Journalize the entry to apply factory overhead to production for February. c. What is the February 28 balance of the account Factory OverheadBlending Department? d. Does the balance in part (c) represent over- or underapplied factory overhead?arrow_forwardIf a factory operates at 100% of capacity one month, 90% of capacity the next month, and 105% of capacity the next month, will a different cost per unit be charged to the work-in-process account each month for factory overhead assuming that a predetermined annual overhead rate is used?arrow_forward
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- Jillian Manufacturing Inc. manufactures a single product and uses a standard cost system. The factory overhead is applied on the basis of direct labor hours. A condensed version of the company’s flexible budget follows: The product requires 3 lb of materials at a standard cost of $5 per pound and 2 hours of direct labor at a standard cost of $10 per hour. For the current year, the company planned to operate at the level of 6,250 direct labor hours and to produce 3,125 units of product. Actual production and costs for the year follow: Required: For the current year, compute the factory overhead rate that will be used for production. Show the variable and fixed components that make up the total predetermined rate to be used. Prepare a standard cost card for the product. Show the individual elements of the overhead rate as well as the total rate. Compute (a) standard hours allowed for production and (b) under- or overapplied factory overhead for the year. Determine the reason for any under- or overapplied factory overhead for the year by computing all variances, using each of the following methods: Two-variance method Three-variance method (appendix) Four-variance method (appendix)arrow_forwardRockford Company has four departmental accounts: Building Maintenance, General Factory Overhead, Machining, and Assembly. The direct labor hour method is used to apply factory overhead to the jobs being worked on in Machining and Assembly. The company expects each production department to use 30,000 direct labor hours during the year. The estimated overhead rates for the year include the following: During the year, both Machining and Assembly used 28,000 direct labor hours. Factory overhead costs incurred during the year follow: In determining application rates at the beginning of the year, cost allocations were made as follows, using the sequential distribution method: Building Maintenance to: General Factory Overhead, 10%; Machining, 50%; Assembly, 40%. General factory overhead was distributed according to direct labor hours. Required: Determine the under- or overapplied overhead for each production department. (Hint: First you must distribute the service department costs.)arrow_forwardBaldwin Printing Company uses a job order cost system and applies overhead based on machine hours. A total of 150,000 machine hours have been budgeted for the year. During the year, an order for 1,000 units was completed and incurred the following: The accountant computed the inventory cost of this order to be 4.30 per unit. The annual budgeted overhead in dollars was: a. 577,500. b. 600,000. c. 645,000. d. 660,000.arrow_forward
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