Proration of Variances; Chapters 14 and 15 Butrico Manufacturing Corporation uses a standard cost system, records materials price variances when direct materials are purchased, and prorates all variances at year-end. Variances associated with direct materials are prorated based on thebalances of direct materials in the appropriate accounts, and variances associated with direct laborand manufacturing overhead are prorated to Finished Goods Inventory and to Cost of Goods Sold(CGS) on the basis of the relative direct labor cost in these accounts at year-end.The following information is for the year ended December 31:The company had no beginning inventories and no ending Work-in-Process (WIP) Inventory. Itapplies manufacturing overhead at 80% of standard direct labor cost.Finished Goods Inventory at 12/31:Direct materials $ 87,000Direct labor 130,500Applied manufacturing overhead 104,400Direct Materials Inventory at 12/31 65,000Cost of Goods Sold for the year ended 12/31:Direct materials $348,000Direct labor 739,500Applied manufacturing overhead 591,600Direct Materials Price Variance (unfavorable) 10,000Direct Materials Usage Variance (favorable) 15,000Direct Labor Rate Variance (unfavorable) 20,000Direct Labor Efficiency Variance (favorable) 5,000Actual manufacturing overhead incurred 690,000Required1. Compute (to the nearest whole dollar) the amount of Direct Materials Price Variance to be prorated toFinished Goods Inventory at December 31.2. Compute (to the nearest whole dollar) the total amount of direct materials cost in the Finished GoodsInventory at December 31, after all materials variances have been prorated. (Hint: The correct amountis $85,732.)3. Compute (to the nearest whole dollar) the total amount of direct labor cost in the Finished Goods Inventoryat December 31, after all variances have been prorated. (Hint: The correct amount is $132,750.)4. Compute (to the nearest whole dollar) the total Cost of Goods Sold (CGS) for the year ended December31, after all variances have been prorated. (Hint: The correct amount is $1,681,678.)5. How, if at all, would the provisions of GAAP regarding inventory costing (i.e., FASB ASC 330-10-30, previously SFAS No. 151—available at www.fasb.org) bear upon the end-of-period variance-disposition question?6. Under absorption (i.e.,, full) costing, explain how reported earnings can be managed by the method usedto dispose of (fixed) overhead cost variances at the end of the period.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Proration of Variances; Chapters 14 and 15 Butrico Manufacturing Corporation uses a
balances of direct materials in the appropriate accounts, and variances associated with direct labor
and manufacturing overhead are prorated to Finished Goods Inventory and to Cost of Goods Sold
(CGS) on the basis of the relative direct labor cost in these accounts at year-end.
The following information is for the year ended December 31:
The company had no beginning inventories and no ending Work-in-Process (WIP) Inventory. It
applies manufacturing overhead at 80% of standard direct labor cost.
Finished Goods Inventory at 12/31:
Direct materials $ 87,000
Direct labor 130,500
Applied manufacturing overhead 104,400
Direct Materials Inventory at 12/31 65,000
Cost of Goods Sold for the year ended 12/31:
Direct materials $348,000
Direct labor 739,500
Applied manufacturing overhead 591,600
Direct Materials Price Variance (unfavorable) 10,000
Direct Materials Usage Variance (favorable) 15,000
Direct Labor Rate Variance (unfavorable) 20,000
Direct Labor Efficiency Variance (favorable) 5,000
Actual manufacturing overhead incurred 690,000
Required
1. Compute (to the nearest whole dollar) the amount of Direct Materials Price Variance to be prorated to
Finished Goods Inventory at December 31.
2. Compute (to the nearest whole dollar) the total amount of direct materials cost in the Finished Goods
Inventory at December 31, after all materials variances have been prorated. (Hint: The correct amount
is $85,732.)
3. Compute (to the nearest whole dollar) the total amount of direct labor cost in the Finished Goods Inventory
at December 31, after all variances have been prorated. (Hint: The correct amount is $132,750.)
4. Compute (to the nearest whole dollar) the total Cost of Goods Sold (CGS) for the year ended December
31, after all variances have been prorated. (Hint: The correct amount is $1,681,678.)
5. How, if at all, would the provisions of GAAP regarding inventory costing (i.e., FASB ASC 330-10-30, previously SFAS No. 151—available at www.fasb.org) bear upon the end-of-period variance-disposition question?
6. Under absorption (i.e.,, full) costing, explain how reported earnings can be managed by the method used
to dispose of (fixed) overhead cost variances at the end of the period.
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