Cost Accounting 15E Chapter 8, Problem 38P Bookmark Show all steps ON Problem Co
ID: 2535366 • Letter: C
Question
Cost Accounting 15E
Chapter 8, Problem 38P Bookmark Show all steps ON Problem Comprehensive review of Chapters 7 and 8, working backward from given variances. The Gallo Company uses a flexible budget and standard costs to aid planning and control of its machining manufacturing operations. Its costing system for manufacturing has two direct-cost categories (direct materials and direct manufacturing labor-both variable) and two overhead- cost categories (variable manufacturing overhead and fixed manufacturing overhead, both allocated using direct manufacturing labor-hours). At the 50,000 budgeted direct manufacturing labor-hour level for August, budgeted direct manufacturing abor is $1,250,000, budgeted variable manufacturing overhead is $500,000, and budgeted fixed manufacturing overhead is $1,000,000. The following actual results are for August: Direct materials price variance (based on purchases) $179,300 F 75,900 U Direct materials efficiency variance Direct manufacturing labor costs incurred 535,500 10,400 U 18,100 U Variable manufacturing overhead flexible-budget variance Variable manufacturing overhead efficiency variance Fixed manufacturing overhead incurred 957,550 The standard cost per pound of direct materials is $11.50. The standard allowance is 6 pounds of direct materials for each unit of product. During August, 20,000 units of product were produced There was no beginning inventory of direct materials. There was no beginning or ending work in process. In August, the direct materials price variance was $1.10 per pound. In July, labor unrest caused a major slowdown in the pace of production, resulting in an unfavorable direct manufacturing labor efficiency variance of $40,000. There was no direct manufacturing labor price variance. Labor unrest persisted into August. Some workers quit. Their replacements had to be hired at higher wage rates, which had to be extended to all workers. The actual average wage rate in August exceeded the standard average wage rate by $0.50 per hour. 1. Compute the following for August: a. Total pounds of direct materials purchased b. Total number of pounds of excess direct materials used C. Variable manufacturing overhead spending variance d. Total number of actual direct manufacturing labor-hours used e. Total number of standard direct manufacturing labor-hours allowed for the units produced f. Production-volume variance 2. Describe how Gallo's control of variable manufacturing overhead items differs from its control of fixed manufacturing overhead itemsExplanation / Answer
1 (a)
Total pounds of direct materials purchased = Direct material price variance / Direct material price variance per pound = $179,300 / 1.1 = 163,000 pounds
1(b)
Total no. of pounds of excess direct material used = Direct material efficiency variance / Standard cost per pount of material = $75,900 / 11.50 = 6,600 pounds
1(c)
Variable manufacturing overhead spending variance = flexible budget variance - efficiency variance = $10,400 - $18,100 = $7,700 favourable
1(d)
Standard direct manufacturing labur rate = Budgeted labor / budgeted hours = 1,250,000 / 50,000 = $25
Actual direct manufacturing labor rate = 25 + 0.5 = $25.50
Total no. of actual direct manufacturing labor hours used = Direct manufacturing labor cost incurred / Actual labor rate = $535,500 / 25.5 = 21,000 hours
1(e)
Standard variable manufacturing labur rate = Budgeted variable manufacturing overhead / budgeted hours = 500,000 / 50,000 = $10
Variable manufacturing overhead efficiency variance = $18,100 / 10 = 1,810 excess hours
Actual direct manufacturing labor rate = 25 + 0.5 = $25.50
Total no. of standard direct manufacturing labor hours = Actual hours - Excess hours = 21,000 - 1,810 = 19,190 hours
1(f)
Budgeted manufacturing overhead rate = Budgeted fixed manufacturing overhead / Budgeted hours = $1,000,000 / 50, 000 = $20
Fixed manufacturing overhead allocated = Overhead rate * Standard hours = $20 * 19,190 = $383,800
Production-volume variance = $1,000,000 - $383,800 = $616,200 unfavourable