Chapter 16, Problem 48E

(Appendix used in requirement [c]) Comprehensive Cost Variance Analysis

Maple Leaf Production manufactures truck tires. The following information is available for the last operating period.

• Maple Leaf produced and sold 92,000 tires for $40 each. Budgeted production was 100,000 tires.
• Standard variable costs per tire follow:

• Fixed production overhead costs:

• Fixed overhead is applied at the rate of $15 per tire.
• Actual production costs:

Required

1. a.      Prepare a cost variance analysis for each variable cost for Maple Leaf Productions.
2. b.      Prepare a fixed overhead cost variance analysis.
3. c.       (Appendix) Prepare the journal entries to record the activity for the last period using standard costing. Assume that all variances are closed to Cost of Goods Sold at the end of the operating period.

To determine

Prepare a cost variance analysis for each variable costs.

Explanation of Solution

Variable cost variance analysis:

The cost analysis of the difference between the actual cost incurred and the budgeted or standard costs that varies with production levels is called the variable cost variance analysis.

Prepare a variable cost variance analysis:

Direct Material Variances	Amount
Price Variance $AQ\left(AP-SP\right)$	$ 76,800F(1)
Efficiency Variance $SP\left(AQ-SQ\right)$	$ 32,000U(2)
Total Variance	$ 44,800F
Direct Labor Variances
Price Variance $AQ\left(AP-SP\right)$	$   14,080U(3)
Efficiency Variance $SP\left(AQ-SQ\right)$	$  28,800F(4)
Total Variance	$   13,920F
Variable Overhead Variance:
Price Variance $AQ\left(AP-SP\right)$	$   3,456U(5)
Efficiency Variance $SP\left(AQ-SQ\right)$	$  7,200U(6)
Total Variance	$   3,744U

Table: (1)

Working Note 1:

$\begin{array}{c}\text{Direct labor price variance = AQ(AP-SP)}\\ \text{= }384,000(\$1.80\text{- \$2)}\\ \text{= \$76,800}\end{array}$

Working Note 2:

$\begin{array}{c}\text{Direct efficiency variance = SP(AQ-SQ)}\\ \text{= \$2 (384,000 - 4 lbs }\times 92,000\text{)}\\ \text{= \$32,000}\end{array}$

Working Note 3:

$\begin{array}{c}\text{Direct labor price variance = AQ(AP-SP)}\\ \text{= (35,200 hours)}\times \text{(\$18}\text{.40 - \$18)}\\ \text{= \$14,080}\end{array}$

Working Note 4:

$\begin{array}{c}\text{Direct labor efficiency variance = SP(AQ-SQ)}\\ \text{= \$18(35,200- 0}\text{.4 hours }\times \text{92,000)}\\ \text{= \$28,800}\end{array}$

Working Note 5:

$\begin{array}{c}\text{Variable overhead price variance = Actual - Standard}\\ \text{= }\$176,500\text{ - \$10}\times \text{17,280}\\ \text{= \$3,456}\end{array}$

Working Note 6:

$\begin{array}{c}\text{Variable overhead efficiency variance = Actual - Standard}\\ \text{= \$172,800- (\$10}\times 0.18\text{hours}\times \text{92,000)}\\ \text{= \$7,200}\end{array}$

To determine

Prepare a fixed overhead cost variance analysis.

Explanation of Solution

Fixed overhead cost variance analysis:

The cost analysis of the difference between the fixed overhead cost incurred and the budgeted or standard fixed overhead costs is called the fixed overhead cost variance analysis.

Prepare a fixed overhead cost variance analysis:

Fixed Overhead Variances
Price Variance $\text{(Actual - Standard)}$	$ 10,000U
Production volume variance $(\text{Applied - Fixed)}$	$30,000F(7)
Total Variance	$ 20,000F

Table: (2)

Working Note 7:

$\begin{array}{c}\text{Production volume variance = Applied - Fixed}\\ \text{= \$1,350,000 - \$15 }\times \text{ 92,000}\\ \text{= \$30,000}\end{array}$

To determine

Prepare journal entries to record the activity based on standard costing.

Explanation of Solution

Journal Entries Using Standard Costing:

While the recording of production processes is done using standard costing, all the costs transferred will be recorded at standard cost without knowing the actual costs or incurring the actual costs.

Prepare the journal entries based on standard costing:

Date	Accounts Title and Explanation	Post Ref.	Debit	Credit
	Journal Entries for Direct Material
	Work-in-Process Inventory		$  7,36,000
	Materials Efficiency Variance		$32,000
	Materials Price Variance			$76,800
	Accounts Payable			$  6,91,200
	(To record the purchase of direct material and variances)
	Journal Entries for Direct Labor
	Work-in-Process Inventory		$  6,62,400
	Direct Labor Price Variance		$14,080
	Direct Labor Efficiency Variance			$28,800
	Wages Payable			$  6,47,680
	To record the cost of direct labor and variances)
	Journal Entries for Variable Overhead
	Work-in-Process Inventory		$  1,65,600
	Variable Overhead Applied			$  1,65,600
	(To transfer the balance of variable overhead applied account)
	Variable Overhead (Actual)		$  1,76,256
	Miscellaneous Payables and Inventory Accounts			$  1,76,256
	(To record the actual overhead cost incurred during the production)
	Variable Overhead (Applied)		$  1,65,600
	Variable Overhead Price Variance		$3,456
	Variable Overhead Efficiency Variance		$7,200
	Variable Overhead (Actual)			$  1,76,256
	(To record and transfer the balance of overhead applied and variance)
	Journal Entries for Fixed Overhead
	Work-in-Process Inventory		$13,80,000
	Fixed Overhead Applied			$13,80,000
	(To record the cost of fixed overhead applied)
	Fixed Overhead (Actual)		$13,60,000
	Miscellaneous Payables and Inventory Accounts			$13,60,000
	(To record the fixed overhead actual cost incurred)
	Fixed Overhead (Applied)		$13,80,000
	Fixed Overhead Price Variance		$10,000
	Fixed Overhead Production volume variance			$30,000
	Fixed Overhead (Actual)			$13,60,000
	(To record fixed overhead variances and applied amount to the production)
	Journal Entries for finished goods
	Finished Goods Inventory		$29,44,000
	Work-in-Process Inventory			$29,44,000
	(To transfer the finished goods inventory balance to work-in-process account)
	Recording 92,000 tires' sale
	Accounts Receivable		$36,80,000
	Sales Revenue			$36,80,000
	Cost of Goods Sold		$29,44,000
	Finished Goods Inventory			$29,44,000
	(To record the sale of finished goods and transfer the balance to finished goods account)
	Journal entries for recording variance
	Materials Price Variance		$76,800
	Direct Labor Efficiency Variance		$28,800
	Fixed Overhead Production Volume Variance		$30,000
	Materials Efficiency Variance			$32,000
	Direct Labor Price Variance			$14,080
	Variable Overhead Price Variance			$3,456
	Variable Overhead Efficiency Variance			$7,200
	Fixed Overhead Price Variance			$10,000
	Cost of Goods Sold			$68,864
	(Transferring the variance balances to cost of goods sold)

Table: (3)