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Chapter 23: Q22E (page 1312)

The May 2018 revenue and cost information for McDonald Outfitters, Inc. follows:

Sales Revenue (at standard) $ 610,000

Cost of Goods Sold (at standard) 348,000

Direct Materials Cost Variance 1,500 F

Direct Materials Efficiency Variance 6,600 F

Direct Labor Cost Variance 4,200 U

Direct Labor Efficiency Variance 2,700 F

Variable Overhead Cost Variance 2,800 U

Variable Overhead Efficiency Variance 1,100

Fixed Overhead Cost Variance 2,300 U

Fixed Overhead Volume Variance 8,300 F

Prepare a standard cost income statement for management through gross profit. Report all standard cost variances for management鈥檚 use. Has management done a good or poor job of controlling costs? Explain.

Short Answer

Expert verified

The standard cost income statement is prepared to show the gross profit of $270,700

Step by step solution

01

Computation of the Material Variance

McDonald Outfitter Inc

Standard Cost Income Statement

For the month ended May 31, 2018

Amount ($)

Amount ($)

Amount ($)

Sales Revenue (At standard)

610,000

Cost of goods sold (At standard)

348,000

Manufacturing Variance:

Direct Material Cost Variance

-1,500

Direct material Efficiency Variance

-6,600

Direct Labor cost Variance

4,200

Direct Labor Efficiency Variance

-2,700

Variable Overhead Cost Variance

2,800

Variable Overhead Efficiency Variance

1,100

Fixed Overhead Cost Variance

2,300

Fixed Overhead Volume Variance

-8,300

Total Manufacturing Variances

-8,700

Cost of goods sold (At Actual)

339,300

Gross Profit

270,700

02

Computation of the Labor Variance

The favorable variance of direct materials and direct labor means that the management did an excellent job controlling the costs. Unfavorable variances are less than the favorable variance, which means that the company's overall management has done a good job at controlling costs.

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Most popular questions from this chapter

Preparing a flexible budget performance report

Cell Plus Technologies manufactures capacitors for cellular base stations and other communication applications. The company鈥檚 July 2018 flexible budget shows output levels of 8,500, 10,000, and 12,000 units. The static budget was based on expected sales of 10,000 units.

Cell One Technologies

Flexible budget

For month ended July 31, 2018

Budgeted amount per unit

Units

8,500

10,000

12,000

Sales revenue

\(24

\)204,000

\(240,000

\)288,000

Variable expenses

13

110,500

130,000

156,000

Contribution margin

93,500

110,000

132,000

Fixed expenses

57,000

57,000

57,000

Operating income

\(36,500

\)53,000

\(75,000

The company sold 12,000 units during July, and its actual operating income was as follows:

Cell One Technologies

Income statement

For the Month Ended July 31, 2018

Sales revenue

\)295,000

Variable expenses

161,100

Contribution margin

133,900

Fixed expenses

58,000

Operating income

$75,900

Requirements

1. Prepare a flexible budget performance report for July 2018.

2. What was the effect on Cell Plus鈥檚 operating income of selling 2,000 units more than the static budget level of sales?

3. What is Cell Plus鈥檚 static budget variance for operating income?

4. Explain why the flexible budget performance report provides more useful information to Cell Plus鈥檚 managers than the simple static budget variance. What insights can Cell Plus鈥檚 managers draw from this performance report?

Preparing a flexible budget and computing standard cost variances

McKnight Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system. McKnight allocates overhead based on yards of direct materials. The company鈥檚 performance report includes the following selected data:

Static Budget (1,025 recliners)

Actual Results (1,005 recliners)

Sales

(1,025 recliners * \(500 each)

\)512,500

(1,005 recliners * \(495 each)

\)497,475

Variable Manufacturing Costs:

Direct Materials

(6,150 yds. @ \(8.50/yard)

52,275

(6,300 yds. @ \)8.30/yard)

52,290

Direct Labor

(10,250 DLHr @ \(9.20/DLHr)

94,300

(9,850 DLHr @ \)9.40/DLHr)

92,590

Variable Overhead

(6,150 yds. @ \(5.10/yard)

31,365

(6,300 yds. @ \)6.50/yard)

40,950

Fixed Manufacturing Costs:

Fixed Overhead

62,730

64,730

Total Cost of Goods Sold

240,670

250,560

Gross Profit

\(271,830

\)246,915

Requirements

1. Prepare a flexible budget based on the actual number of recliners sold.

2. Compute the cost variance and the efficiency variance for direct materials and for direct labor. For manufacturing overhead, compute the variable overhead cost, variable overhead efficiency, fixed overhead cost, and fixed overhead volume variances. Round to the nearest dollar.

3. Have McKnight鈥檚 managers done a good job or a poor job controlling materials, labor, and overhead costs? Why?

4. Describe how McKnight鈥檚 managers can benefit from the standard cost system.

Question: What are the two components of the static budget variance? How are they calculated?

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?

Headset manufactures headphone cases. During September 2018, the company produced 106,000 cases and recorded the following cost data:

Standard Cost Information

Quantity

Cost

Direct Materials

2 parts

\( 0.16 per part

Direct Labor

0.02 hours

8.00 per hour

Variable Manufacturing Overhead

0.02 hours

11.00 per hour

Fixed Manufacturing Overhead (\)30,720 for static budget volume of 96,000 units and 1,920 hours, or \(16 per hour)

Actual Information

Direct Materials (209,000 parts @ \)0.21 per part) \( 43,890

Direct Labor(1,620 hours @ \)8.10 per hour) 13,122

Variable Manufacturing Overhead 9,000

Fixed Manufacturing Overhead 30,000

Requirements

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

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

3. Headset鈥檚 management used better颅quality materials during September. Discuss the trade颅off between the two direct material variances.
See all solutions

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