Concept explainers
As part of its cost control program, Tracer Company uses a
The following direct labor standard was established for one of Tracer’s products, effective June 1, 2012, the beginning of the fiscal year:
The standard was based on the direct labor being performed by a team consisting of five persons with Assembler A skills, three persons with Assembler B skills, and two persons with machinist skills; this team represents the most efficient use of the company’s skilled employees. The standard also assumed that the quality of direct materials that had been used in prior years would be available for the coming year.
For the first seven months of the fiscal year, actual
Furthermore, Tracer has been notified by its direct materials supplier that lower-quality direct materials will be supplied beginning January 1. Normally, one unit of direct materials is required for each good unit produced, and no units are lost due to defective direct materials. Tracer estimates that 6 percent of the units manufactured after January 1 will be rejected in the final inspection process due to defective direct materials.
Required:
- 1. Determine the number of units of lower quality direct materials that Tracer Company must enter into production in order to produce 47,000 good finished units.
- 2. How many hours of each class of direct labor must be used to manufacture 47,000 good finished units?
- 3. Determine the amount that should be included in Tracer’s January operating budget for the planned direct labor variance caused by the reorganization of the direct labor teams and the lower quality direct materials. (CMA adapted)
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Cornerstones of Cost Management (Cornerstones Series)
- Potter Company has installed a JIT purchasing and manufacturing system and is using back-flush accounting for its cost flows. It currently uses a two-trigger approach with the purchase of materials as the first trigger point and the completion of goods as the second trigger point. During the month of June, Potter had the following transactions: There were no beginning or ending inventories. All goods produced were sold with a 60 percent markup. Any variance is closed to Cost of Goods Sold. (Variances are recognized monthly.) Required: 1. Prepare the journal entries that would have been made using a traditional accounting approach for cost flows. 2. Prepare the journal entries for the month using backflush costing.arrow_forwardPotter Company has installed a JIT purchasing and manufacturing system and is using back-flush accounting for its cost flows. It currently uses a two-trigger approach with the purchase of materials as the first trigger point and the completion of goods as the second trigger point. During the month of June, Potter had the following transactions: There were no beginning or ending inventories. All goods produced were sold with a 60 percent markup. Any variance is closed to Cost of Goods Sold. (Variances are recognized monthly.) Required: 1. Prepare the journal entries for the month of May using backflush costing, assuming that Potter uses the completion of goods as the only trigger point. 2. Prepare the journal entries for the month of May using backflush costing, assuming that Potter uses the sale of goods as the only trigger point.arrow_forwardWarner Company has the following data for the past year: Warner uses the overhead control account to accumulate both actual and applied overhead. Required: 1. Calculate the overhead variance for the year and close it to cost of goods sold. 2. Assume the variance calculated is material. After prorating, close the variances to the appropriate accounts and provide the final ending balances of these accounts. 3. What if the variance is of the opposite sign calculated in Requirement 1? Provide the appropriate adjusting journal entries for Requirements 1 and 2.arrow_forward
- Madison Company uses the following rule to determine whether direct labor efficiency variances ought to be investigated. A direct labor efficiency variance will be investigated anytime the amount exceeds the lesser of 12,000 or 10 percent of the standard labor cost. Reports for the past five weeks provided the following information: Required: 1. Using the rule provided, identify the cases that will be investigated. 2. Suppose that investigation reveals that the cause of an unfavorable direct labor efficiency variance is the use of lower quality direct materials than are usually used. Who is responsible? What corrective action would likely be taken? 3. Suppose that investigation reveals that the cause of a significant favorable direct labor efficiency variance is attributable to a new approach to manufacturing that takes less labor time but causes more direct materials waste. Upon examining the direct materials usage variance, it is discovered to be unfavorable, and it is larger than the favorable direct labor efficiency variance. Who is responsible? What action should be taken? How would your answer change if the unfavorable variance were smaller than the favorable?arrow_forwardYohan Company has the following balances in its direct materials and direct labor variance accounts at year-end: Unadjusted Cost of Goods Sold equals 1,500,000, unadjusted Work in Process equals 236,000, and unadjusted Finished Goods equals 180,000. Required: 1. Assume that the ending balances in the variance accounts are immaterial and prepare the journal entries to close them to Cost of Goods Sold. What is the adjusted balance in Cost of Goods Sold after closing out the variances? 2. What if any ending balance in a variance account that exceeds 10,000 is considered material? Close the immaterial variance accounts to Cost of Goods Sold and prorate the material variances among Cost of Goods Sold, Work in Process, and Finished Goods on the basis of prime costs in these accounts. The prime cost in Cost of Goods Sold is 1,050,000, the prime cost in Work in Process is 165,200, and the prime cost in Finished Goods is 126,000. What are the adjusted balances in Work in Process, Finished Goods, and Cost of Goods Sold after closing out all variances? (Round ratios to four significant digits. Round journal entries to the nearest dollar.)arrow_forwardUsing variance analysis and interpretation Last year, Endicott Corp. adopted a standard cost system. Labor standards were set on the basis of time studies and prevailing wage rates. Materials standards were determined from materials specifications and the prices then in effect. On June 30, the end of the current fiscal year, a partial trial balance revealed the following: Standards set at the beginning of the year have remained unchanged. All inventories are priced at standard cost. What conclusions can be drawn from each of the four variances shown in Endicotts trial balance?arrow_forward
- Using variance analysis and interpretation Last year, Wrigley Corp. adopted a standard cost system. Labor standards were set on the basis of time studies and prevailing wage rates. Materials standards were determined from materials specifications and the prices then in effect. On June 30, the end of the current fiscal year, a partial trial balance revealed the following: Standards set at the beginning of the year have remained unchanged. All inventories are priced at standard cost. What conclusions can be drawn from each of the four variances shown in Wrigleys trial balance?arrow_forwardGreiner Company makes and sells high-quality glare filters for microcomputer monitors. John Craven, controller, is responsible for preparing Greiners master budget and has assembled the following data for the coming year. The direct labor rate includes wages, all employee-related benefits, and the employers share of FICA. Labor saving machinery will be fully operational by March. Also, as of March 1, the companys union contract calls for an increase in direct labor wages that is included in the direct labor rate. Greiner expects to have 5,600 glare filters in inventory on December 31 of the current year, and has a policy of carrying 35 percent of the following month's projected sales in inventory. Information on the first four months of the coming year is as follows: Required: 1. Prepare the following monthly budgets for Greiner Company for the first quarter of the coming year. Be sure to show supporting calculations. a. Production budget in units b. Direct labor budget in hours c. Direct materials cost budget d. Sales budget 2. Calculate the total budgeted contribution margin for Greiner Company by month and in total for the first quarter of the coming year. Be sure to show supporting calculations. (CMA adapted)arrow_forwardSmith Industries uses a cost system that carries direct materials inventory at a standard cost. The controller has established these standards for the cost of one basket (unit): Smith Industries made 3,000 baskets in July and used 15,500 pounds of material to make these units. Smith Industries paid $39,370 for the 15,500 pounds of material. A. What was the direct materials price variance for July? B. What was the direct materials quantity variance for July? C. What is the total direct materials cost variance? D. If Smith Industries used 15,750 pounds to make the baskets, what would be the direct materials quantity variance?arrow_forward
- The management of Golding Company has determined that the cost to investigate a variance produced by its standard cost system ranges from 2,000 to 3,000. If a problem is discovered, the average benefit from taking corrective action usually outweighs the cost of investigation. Past experience from the investigation of variances has revealed that corrective action is rarely needed for deviations within 8% of the standard cost. Golding produces a single product, which has the following standards for materials and labor: Actual production for the past 3 months follows, with the associated actual usage and costs for materials and labor. There were no beginning or ending raw materials inventories. Required: 1. What upper and lower control limits would you use for materials variances? For labor variances? 2. Compute the materials and labor variances for April, May, and June. Identify those that would require investigation by comparing each variance to the amount of the limit computed in Requirement 1. Compute the actual percentage deviation from standard. Round all unit costs to four decimal places. Round variances to the nearest dollar. Round variance rates to three decimal places so that percentages will show to one decimal place. 3. CONCEPTUAL CONNECTION Let the horizontal axis be time and the vertical axis be variances measured as a percentage deviation from standard. Draw horizontal lines that identify upper and lower control limits. Plot the labor and material variances for April, May, and June. Prepare a separate graph for each type of variance. Explain how you would use these graphs (called control charts) to assist your analysis of variances.arrow_forwardFargo Co. manufactures products in batches of 100 units per batch. The company uses a standard cost system and prepares budgets that call for 500 of these batches per period. Budgeted fixed overhead is $60,000 per period. The standard costs per batch follow: During the period, 503 batches were manufactured, and the following costs were incurred: Required: Calculate the variances for materials, labor, and overhead. For overhead, use the two-variance method. (Hint: Please use the information given about the budgeted fixed overhead to compute the variable overhead rate.)arrow_forwardThe normal capacity of a manufacturing plant is 30,000 direct labor hours or 20,000 units per month. Standard fixed costs are 6,000, and variable costs are 12,000. Data for two months follow: For each month, make a single journal entry to charge overhead to Work in Process, to close Factory Overhead, and to record variances. Indicate the types of variances and state whether each is favorable or unfavorable. (Hint: You must first compute the flexible-budget and production-volume variances.)arrow_forward
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