Chapter 9, Problem 33P

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:

1. a. Units produced: small staplers, 35,000; regular staplers, 70,000.
2. b. Direct materials purchased and used: 56,000 pounds at $1.55—13,000 for the small stapler and 43,000 for the regular stapler. There were no beginning or ending direct materials inventories.
3. c. Direct labor: 14,800 hours—3,600 hours for the small stapler and 11,200 hours for the regular stapler. Total cost of direct labor: $114,700.
4. d. Variable overhead: $607,500.
5. e. Fixed overhead: $350,000.

Required:

1. 1. Prepare a standard cost sheet showing the unit cost for each product.
2. 2. Compute the direct materials price and usage variances for each product. Prepare journal entries to record direct materials activity.
3. 3. Compute the direct labor rate and efficiency variances for each product. Prepare journal entries to record direct labor activity.
4. 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. 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.

To determine

Prepare a standard cost sheet and show the unit cost for each product.

Explanation of Solution

Standard Cost: An estimated cost which is used for delivering a product under normal condition and it determine the performance of the company is called standard cost. The standard cost is expected cost which can be taken to compare with the actual cost to measure the operating efficiency of the company.

Prepare a standard cost sheet and show the unit cost for each product:

Small staplers:

Particulars	Standard Price ($)	Standard Usage	Standard Cost ($)
	(a)	(b)	$\left(\text{c = a}\times \text{b}\right)$
Direct materials	1.60	0.375 lb	0.60
Direct labor	8.00	0.100 hr	.80
Fixed overhead	30.00	0.100 hr	3.00
Variable overhead	40.00	0.100hr	4.00
Unit cost			$8.40

Table (1)

Regular staplers:

Particulars	Standard Price ($)	Standard Usage	Standard Cost ($)
	(a)	(b)	$\left(\text{c = a}\times \text{b}\right)$
Direct materials	1.60	0.625 lb.	1.00
Direct labor	8.00	0.150 hr.	1.20
Fixed overhead	30.00	0.150 hr.	4.50
Variable overhead	40.00	0.150 hr.	6.00
Unit cost			$12.70

Table (1)

Working note 1: Calculate the standard usage for direct materials:

For small staplers:

$\begin{array}{c}\text{Standard usage for direct materials =}\left(\frac{\begin{array}{l}\text{ Standard quantities of direct }\\ \text{materials for small staplers}\end{array}}{\begin{array}{l}\text{Total standard quanties }\\ \text{of direct materials }\end{array}}\right)\\ \text{ =}\left(\frac{\text{ 6}\text{.0}}{\text{16 }}\right)\\ =0.375\end{array}$

Working note 2: Calculate the standard usage for direct materials:

For regular staplers:

$\begin{array}{c}\text{Standard usage for direct materials =}\left(\frac{\begin{array}{l}\text{ Standard quantities of direct }\\ \text{materials for regular staplers}\end{array}}{\begin{array}{l}\text{Total standard quanties }\\ \text{of direct materials }\end{array}}\right)\\ \text{ =}\left(\frac{\text{ 10}\text{.0}}{\text{16 }}\right)\\ =0.625\end{array}$

Conclusion

Therefore, the standard cost for small staplers and regular staplers are $8.40 and $12.70 respectively.

To determine

Calculate the direct materials price variance and the direct materials usage variance and prepare journal entries to record direct material activity.

Explanation of Solution

Direct material price variance: The variation in between actual price and estimated price paid for materials multiplied by the actual quantity is called material price variance. It is used to determine difference in price paid for material the price that was supposed to be paid for material.

The following formula is used to calculate direct material price variance:

$\text{Direct materials price variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Price}-\\ \text{Standard Price}\end{array}\right)\\ \times \text{Actual Quantity}\end{array}\right]$

Direct material usage (efficiency) variance: It is a measure that determines the variation in between actual and standard quantity of input multiplied by the standard unit price is called material usage variance.

The following formula is used to calculate direct material usage variance:

$\text{Direct materials usage variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Quantity}-\\ \text{Standard Quantity}\end{array}\right)\\ \times \text{Standard Price}\end{array}\right]$

Compute the direct materials price variance:

$\begin{array}{c}\text{Direct materials price variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Price}-\\ \text{Standard Price}\end{array}\right)\\ \times \text{Actual Quantity}\end{array}\right]\\ =\left[\begin{array}{l}\left(\begin{array}{l}\text{\$1}\text{.55}\\ -\text{\$1}\text{.60 }\end{array}\right)\\ \times \text{56,000}\end{array}\right]\\ =\left[\text{\$}\text{.05}\times \text{56,000}\right]\\ =\$2,800F\end{array}$

Compute the direct materials usage variance:

For small staplers:

$\begin{array}{c}\text{Direct materials usage variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Quantity}-\\ \text{Standard Quantity}\end{array}\right)\\ \times \text{Standard Price}\end{array}\right]\\ =\left[\begin{array}{l}\left(\text{13,000}-\left(0.375\times 35,000\right)\right)\\ \times \$1.60\end{array}\right]\\ =\left[\begin{array}{l}\left(\text{13,000}-13,125\right)\\ \times \$1.60\end{array}\right]\\ =\left[125\times \$1.60\right]\\ =\$200\text{ F}\end{array}$

For regular staplers:

$\begin{array}{c}\text{Direct materials usage variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Quantity}-\\ \text{Standard Quantity}\end{array}\right)\\ \times \text{Standard Price}\end{array}\right]\\ =\left[\begin{array}{l}\left(4\text{3,000}-\left(0.625\times 70,000\right)\right)\\ \times \$1.60\end{array}\right]\\ =\left[\begin{array}{l}\left(4\text{3,000}-43,750\right)\\ \times \$1.60\end{array}\right]\\ =\left[750\times \$1.60\right]\\ =\$1,200\text{ F}\end{array}$

Prepare journal entries to record direct material activity:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Direct Materials	89,600
	Direct Materials Price variance		2,800
	Accounts Payable		86,800
	(To record the purchase of direct materials)
	Work in Process	91,000
	Direct Materials Usage Variance		1,400
	Direct Materials		89,600
	(To record the usage of direct materials)
	Direct Materials Price variance	2,800
	Direct Materials Usage Variance	1,400
	Cost of Goods Sold		4,200
	(To close the purchase and usage of direct materials)

Table (2)

Conclusion

Therefore, the direct materials price variance and the usage variance is $200 F and $1,200 F respectively.

To determine

Calculate the direct labor rate variance and labor efficiency variance and prepare journal entries to record direct material activity.

Explanation of Solution

Direct Labor Rate Variance: The direct labor rate variance is a measure to determine the variation in the estimated cost of the direct labor and the actual cost of the direct labor and is multiplied by the actual hours is called direct labor rate variance.

The following formula is used to calculate the direct labor rate variance:

$\text{Direct labor rate variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Rate}-\\ \text{Standard Rate}\end{array}\right)\\ \times \text{Actual Hours}\end{array}\right]$

Direct labor efficiency variance is a measure that determines the difference between the estimated labor hours and the actual labor hours used and is multiplied by the standard rate per hour is called material usage variance.

The following formula is used to calculate direct labor efficiency variance:

$\text{Direct labor efficiency variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Hours}-\\ \text{Standard Hours}\end{array}\right)\\ \times \text{Standard Rate Per Hour}\end{array}\right]$

Calculate the direct labor rate variance:

$\begin{array}{c}\text{Direct labor rate variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Rate}-\\ \text{Standard Rate}\end{array}\right)\\ \times \text{Actual Hours}\end{array}\right]\\ =\left[\begin{array}{l}\left(\text{\$7}\text{.75}-\$8.00\right)\\ \times 14,800\text{Hours}\end{array}\right]\\ =\left[\$.25\times 14,800\text{Hours}\right]\\ =\$3,700\text{F}\end{array}$

Calculate the labor efficiency variance:

For small staplers:

$\begin{array}{c}\text{Direct labor efficiency variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Hours}-\\ \text{Standard Hours}\end{array}\right)\\ \times \text{Standard Rate Per Hour}\end{array}\right]\\ =\left[\begin{array}{l}\left(\text{3,600 hours}-\left(0.1\times 35,000\text{ hours}\right)\right)\\ \times \$8.00\text{ Per Hour}\end{array}\right]\\ =\left[\begin{array}{l}\left(\text{3,600 hours}-3,500\right)\\ \times \$8.00\text{ Per Hour}\end{array}\right]\\ =\left[100\times \$8.00\text{ Per Hour}\right]\\ =\$800\text{ U}\end{array}$

Calculate the labor efficiency variance:

For regular staplers:

$\begin{array}{c}\text{Direct labor efficiency variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Hours}-\\ \text{Standard Hours}\end{array}\right)\\ \times \text{Standard Rate Per Hour}\end{array}\right]\\ =\left[\begin{array}{l}\left(\text{11,200 hours}-\left(0.15\times 70,000\text{ hours}\right)\right)\\ \times \$8.00\text{ Per Hour}\end{array}\right]\\ =\left[\begin{array}{l}\left(\text{11,200}-10,500\right)\\ \times \$8.00\text{ Per Hour}\end{array}\right]\\ =\left[700\times \$8.00\text{ Per Hour}\right]\\ =\$5,600\text{ U}\end{array}$

Prepare journal entries to record direct material activity:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Work in Process	112,000
	Direct Labor Efficiency Variance	6,400
	Direct Labor Rate Variance		3,700
	Wages Payable		114,700
	(To record the use of direct labor)
	Cost of Goods Sold	2,700
	Direct Labor Rate Variance	3,700
	Direct Labor Efficiency Variance		6,400
	(To record the direct labor variances)

Table (3)

Working note 3:

Calculate the amount of work-in process:

$\begin{array}{c}\text{Work-in process =}\left\{\begin{array}{l}\left[\begin{array}{l}\left(\begin{array}{l}\text{ Direct labor hour for small staplers}\\ \times \text{ Unit produced}\end{array}\right)\\ \text{+}\left(\begin{array}{l}\text{ Direct labor hour for regular staplers}\\ \times \text{ Unit produced}\end{array}\right)\end{array}\right]\\ \times \text{Standard rate for labor}\end{array}\right\}\\ \text{=}\left\{\begin{array}{l}\left[\begin{array}{l}\left(\text{ 0}\text{.1}\times \text{ 35,000}\right)\\ \text{+}\left(\text{ 0}\text{.15}\times \text{ 70,000}\right)\end{array}\right]\\ \times \text{\$8}\text{.00}\end{array}\right\}\\ \text{=}\left\{\begin{array}{l}\left[3,500\text{ +}10,500\right]\\ \times \text{\$8}\text{.00}\end{array}\right\}\\ =\$112,000\end{array}$

Conclusion

Therefore, the direct labor rat variance and the efficiency variance are $800 U and $5,600 U respectively.

To determine

Calculate the fixed overhead spending and variable overhead and prepare journal entries to record overhead activity.

Explanation of Solution

Fixed overhead spending variance: It is the difference between actual fixed overhead and the budgeted fixed overhead.

Favorable variance occurs only when the fixed overhead is less than the budgeted overhead. Unfavorable variance occurs only when the fixed overhead is more than the budgeted overhead.

The following formula is used to calculate fixed overhead spending variance:

 $\text{Fixed overhead spending variance = }\left(\begin{array}{l}\text{Actual fixed overhead}\\ -\text{Budgeted fixed overhead}\end{array}\right)$

Fixed overhead volume variance: It is the difference between budgeted fixed overhead and the applied fixed overhead.

The following formula is used to calculate fixed overhead volume variance:

$\text{Volume variance = }\left(\begin{array}{l}\text{Budgeted fixed overhead}\\ -\text{Applied fixed overhead}\end{array}\right)$

Calculate the fixed overhead spending variance:

$\begin{array}{c}\text{Fixed overhead spending variance = }\left(\begin{array}{l}\text{Actual fixed overhead}\\ -\text{Budgeted fixed overhead}\end{array}\right)\\ \text{ = }\left(\text{\$350,000}-\$360,000\right)\\ =\$10,000\text{ F}\end{array}$

Calculate the volume variance:

Step 1: Compute the applied fixed overhead.

$\begin{array}{c}\text{Applied fixed overhead =}\left[\begin{array}{l}\text{ Standard fixed overhead rate}\times \\ \text{ Standard hours}\end{array}\right]\\ \text{=}\left[\text{\$30}\times 14,000\text{ hours}\right]\\ =\$420,000\end{array}$

Step 2: Compute the volume variance.

$\begin{array}{c}\text{Volume variance = }\left(\begin{array}{l}\text{Budgeted fixed overhead}\\ -\text{Applied fixed overhead}\end{array}\right)\\ \text{= }\left(\$360,000-\$420\text{,000}\right)\\ =\$60,000\text{ F}\end{array}$

Working note 4: Calculate the standard fixed overhead rate:

$\begin{array}{c}\text{Standard fixed overhead rate =}\left(\frac{\text{ Standard fixed overhead}}{\text{Direct labor hours}}\right)\\ \text{=}\left(\frac{\text{ \$360,000}}{\text{12,000}}\right)\\ =\$30\end{array}$

Working note 5: Calculate the standard hours:

$\begin{array}{c}\text{Standard hours =}\left\{\begin{array}{l}\left[\begin{array}{l}\left(\begin{array}{l}\text{ Direct labor hour for small staplers}\\ \times \text{ Unit produced}\end{array}\right)\\ \text{+}\left(\begin{array}{l}\text{ Direct labor hour for regular staplers}\\ \times \text{ Unit produced}\end{array}\right)\end{array}\right]\\ \times \text{Standard rate for labor}\end{array}\right\}\\ \text{=}\left[\begin{array}{l}\left(\text{ 0}\text{.1}\times \text{ 35,000}\right)\\ \text{+}\left(\text{ 0}\text{.15}\times \text{ 70,000}\right)\end{array}\right]\\ \text{=}\left[3,500\text{ +}10,500\right]\\ =\$14,000\end{array}$

Overhead Variance: The overhead variance is the difference arising between the real overhead consumed in the production of a product, and the estimated overhead determined in the production of that product.

Spending variances: It arises when management pays an amount which is different from the standard price for purchasing an item. The variable overhead spending variance measures the total effect of differences in the actual variable overhead rate (AVOR) and the standard variable overhead rate (SVOR).

Efficiency variances: It arises when standard direct labor hours expected for actual production different from labor the actual direct labor hours used.

Variable overhead efficiency variance tells managers how much of the total variable manufacturing overhead variance is due to using more or fewer machine hours than anticipated for the actual volume of output.

Compute the variable overhead spending variance:

Step 1: Compute the budgeted variable overhead cost.

$\begin{array}{c}\text{Budgeted variable overhead cost =}\left[\begin{array}{l}\text{ Standard variable overhead rate}\\ \times \text{Actual direct labor hours}\end{array}\right]\\ \text{ =}\left[\text{\$40}\text{.00}\times 14,800\right]\\ =\$592,000\end{array}$

Step 2: Compute the variable overhead spending variance.

$\begin{array}{c}\text{Variable overhead spending variance = }\left[\begin{array}{c}\text{Actual variable overhead costs}-\\ \text{Budgeted variable overhead costs}\end{array}\right]\\ \text{= }\left[\text{\$607,500}-\$\text{592,000}\right]\\ =\$15,500\text{U}\end{array}$

Compute the variable overhead efficiency variance:

Step 1: Compute the applied variable overhead.

$\begin{array}{c}\text{Applied variable overhead =}\left[\begin{array}{l}\text{ Standard variable overhead rate}\\ \times \text{Standard hours}\end{array}\right]\\ \text{=}\left[\text{\$40}\times 14,000\right]\\ =\$560,000\end{array}$

Step 2: Compute the variable overhead efficiency variance.

$\begin{array}{c}\text{Efficiency variance = }\left(\begin{array}{l}\text{Budgeted variable overhead}\\ -\text{Applied variable overhead}\end{array}\right)\\ \text{= }\left(\$592,000-\$\text{560,000}\right)\\ =\$32,000\text{ U}\end{array}$

Prepare journal entries to record overhead activity:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Work in Process	560,000
	Variable Overhead Control		560,000
	(To close the overhead variances)
	Work in Process	420,000
	Fixed Overhead Control		420,000
	(To close the overhead variances)
	Variable Overhead Control	607,500
	Miscellaneous Accounts		607,500
	(To record incurrence of actual overhead)
	Fixed Overhead Control	350,000
	Miscellaneous Accounts		350,000
	(To record incurrence of actual overhead)
	Fixed Overhead Control	70,000
	Variable Overhead Spending Variance	15,500
	Variable Overhead Efficiency Variance	32,000
	Fixed Overhead Spending Variance		10,000
	Fixed Overhead Volume Variance		60,000
	Variable Overhead Control		47,500
	(To close the overhead variances)
	Cost of Goods Sold	47,500
	Variable Overhead Spending Variance		15,500
	Variable Overhead Efficiency Variance		32,000
	(To close the overhead variances)
	Fixed Overhead Spending Variance	10,000
	Fixed Overhead Volume Variance	60,000
	Cost of Goods Sold		70,000
	(To close the cost of goods sold)

Table (3)

Conclusion

Therefore, the fixed overhead spending and volume variance are $10,000 F and $60,000 U respectively.

Therefore, the variable overhead spending and efficiency variance are $15,500 U and $32,000 U respectively.

To determine

Calculate the total direct materials and direct labor usage variances.

Explanation of Solution

Calculate the total direct materials variances:

$\begin{array}{c}\text{Direct materials price variance}=\left\{\begin{array}{l}\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual Quantity}-\\ \text{Standard Quantity for small stapler}\end{array}\right)\\ -\text{Standard Quantity for regular stapler}\end{array}\right]\\ \times \text{Standard Price}\end{array}\right\}\\ =\left\{\begin{array}{l}\left[\left(\begin{array}{l}\text{56,000}\\ -\text{13,125 }\end{array}\right)-43,750\right]\\ \times \$1.60\end{array}\right\}\\ =\left\{\begin{array}{l}\left[42,875-43,750\right]\\ \times \$1.60\end{array}\right\}\\ =\left[\text{875}\times \$1.60\right]\\ =\$1,400F\end{array}$

Calculate the total direct labor usage variances:

$\begin{array}{c}\text{Direct materials price variance}=\left\{\begin{array}{l}\left[\left(\begin{array}{l}\text{Actual hours}-\\ \text{Standard hours for small stapler}\\ -\text{Standard hours for regular stapler}\end{array}\right)\right]\\ \times \text{Standard rate}\end{array}\right\}\\ =\left\{\begin{array}{l}\left[\left(\begin{array}{l}\text{14,800}\\ -3,\text{500}\\ -10,\text{500 }\end{array}\right)\right]\\ \times \$8\end{array}\right\}\\ =\left[\text{800}\times \$8\right]\\ =\$6,400\text{U}\end{array}$

Conclusion

Therefore, the total direct materials and direct labor usage variances are $1,400 F and $6,400 U respectively.