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Chapter 23: Q14SE (page 1309)

Question:Use the following information to prepare a standard cost income statement for Mitchell Company for 2018.

Cost of Goods Sold (at standard) \( 366,000

Direct Labor Efficiency Variance \) 19,500 F

Sales Revenue (at standard) 570,000

Variable Overhead Efficiency Variance 3,300 U

Direct Materials Cost Variance 7,200 U

Fixed Overhead Volume Variance 12,500 F

Direct Materials Efficiency Variance 2,700 U

Selling and Administrative Expenses 71,000

Direct Labor Cost Variance 42,000 U

Variable Overhead Cost Variance 1,700 F

Fixed Overhead Cost Variance 2,100 F

Short Answer

Expert verified

Answer

The operating income of the Mitchell Company is computed as $113,600

Step by step solution

01

Definition of cost of sales revenue

The sales revenue is defined as the revenue collected by the company in exchange for the goods sold by the business to the customers.

02

Preparation standard cost Income statement

Mitchell Company
Standard Cost Income Statement
For the year ended December 31, 2018

Amount ($)

Amount ($)

Amount ($)

Sales Revenue at standard

570,000

Cost of goods sold at standard cost

366,000

Manufacturing Cost Variances:

Direct Materials Cost Variance

7,200

Direct Material Efficiency Variance

2,700

Direct Labor Cost Variance

42,000

Direct Labor Efficiency Variance

-19,500

Variable Overhead Cost Variance

-1,700

Variable Overhead Efficiency Variance

3,300

Fixed Overhead Cost Variance

-2,100

Fixed Overhead Volume Variance

-12,500

Total Manufacturing Variance

19,400

Cost of goods sold at actual cost

385,400

Gross Profit

184,600

Selling and Administrative Expenses

71,000

Operating Income

113,600

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Most popular questions from this chapter

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颅-in颅-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?

Question:This Try It! continues the previous Try It! for Tipton Company, a shirt manufacturer. During June, Tipton made 1,200 shirts but had budgeted production at 1,400 shirts. Tipton gathered the following additional data:

Variable overhead cost standard \(0.50 per DLHr

Direct labor efficiency standard 2.00 DLHr per shirt

Actual amount of direct labor hours 2,520 DLHr

Actual cost of variable overhead \)1,512

Fixed overhead cost standard \(0.25 per DLHr

Budgeted fixed overhead \)700

Actual cost of fixed overhead $750

Calculate the following variances:

13. Variable overhead cost variance

14. Variable overhead efficiency variance

15. Total variable overhead variance

16. Fixed overhead cost variance

17. Fixed overhead volume variance

18. Total fixed overhead variance

Question:Explain the difference between a cost standard and an efficiency standard. Give an example of each.

Drew Castello, general manager of Sunflower Manufacturing, was frustrated. He wanted the budgeted results, and his staff was not getting them to him fast enough. Drew decided to pay a visit to the accounting office, where Jeff Hollingsworth was supposed to be working on the reports. Jeff had recently been hired to update the accounting system and speed up the reporting process.

鈥淲hat鈥檚 taking so long?鈥� Drew asked. 鈥淲hen am I going to get the variance reports?鈥� Jeff sighed and attempted to explain the problem. 鈥淪ome of the variances appear to be way off. We either have a serious problem in production, or there is an error in the spreadsheet. I want to recheck the spreadsheet before I distribute the report.鈥� Drew pulled up a chair, and the two men went through the spreadsheet together. The formulas in the spreadsheet were correct and showed a large unfavorable direct labor efficiency variance. It was time for Drew and Jeff to do some investigating.

After looking at the time records, Jeff pointed out that it was unusual that every employee in the production area recorded exactly eight hours each day in direct labor. Did they not take breaks? Was no one ever five minutes late getting back from lunch? What about clean颅up time between jobs or at the end of the day?

Drew began to observe the production laborers and noticed several disturbing items. One employee was routinely late for work, but his time card always showed him clocked in on time. Another employee took 10颅 to 15颅minute breaks every hour, averaging about 1 hours each day, but still reported eight hours of direct labor each day. Yet another employee often took an extra 30 minutes for lunch, but his time card showed him clocked in on time. No one in the production area ever reported any 鈥渄own time鈥� when they were not working on a specific job, even though they all took breaks and completed other tasks such as doing clean颅up and attending department meetings.

Requirements

1. How might the observed behaviors cause an unfavorable direct labor efficiency variance?

2. How might an employee鈥檚 time card show the employee on the job and working when the team member was not present?

3. Why would the employees鈥� activities be considered fraudulent?

Question:Match the product cost variance with the manager most probably responsible. Some answers may be used more than once. Some answers may not be used.

Variance Manager

19. Variable overhead cost variance

20. Direct materials efficiency variance

21. Direct labor cost variance

22. Fixed overhead cost variance

23. Direct materials cost variance

a. Human resources

b. Purchasing

c. Production
See all solutions

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