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Part 1 Study Unit 7

Part 1 Study Unit 7. Fausto Company employs a standard cost system in which direct materials inventory is carried at standard cost. The company has established the following standard for the materials costs of one unit of product: Standard 4 pounds Quantity $ 7.50/pound

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Part 1 Study Unit 7

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  1. Part 1 Study Unit 7

  2. Fausto Company employs a standard cost system in which direct materials inventory is carried at standard cost. The company has established the following standard for the materials costs of one unit of product: Standard 4 pounds Quantity $ 7.50/pound Standard Cost $30.00 During June, the company purchased 166,100 pounds of direct material at a total cost of $1,362,020. The company manufactured 34,600 units of product during June using 140,450 pounds of direct materials. The price variance for the direct materials acquired by the company during June is (Do not round intermediate calculations.): $98,315 favorable. $116,270 favorable. $116,270 unfavorable. $98,315 unfavorable.

  3. Fausto Company employs a standard cost system in which direct materials inventory is carried at standard cost. The company has established the following standard for the materials costs of one unit of product: Standard 4 pounds Quantity $ 7.50/pound Standard Cost $30.00 During June, the company purchased 166,100 pounds of direct material at a total cost of $1,362,020. The company manufactured 34,600 units of product during June using 140,450 pounds of direct materials. The price variance for the direct materials acquired by the company during June is (Do not round intermediate calculations.): $98,315 favorable. $116,270 favorable. $116,270 unfavorable. $98,315 unfavorable. First, determine the actual price per unit of materials as follows. Total cost of $1,362,020 ÷ total pounds of 166,100 = $8.20 per pound. Then, the price variance for the direct material acquired by the company is determined as follows. Materials price variance = AQ × (AP − SP). Materials price variance = 166,100 × ($8.20 − $7.50) = $116,270 (U).

  4. Fausto Company employs a standard cost system in which direct materials inventory is carried at standard cost. The company has established the following standard for the materials costs of one unit of product: StandardQuantity StandardPrice StandardCost 3 pounds $  7.8/pound $23.4 During June, the company purchased 166,700 pounds of direct material at a total cost of $1,466,960. The company manufactured 47,200 units of product during June using 143,950 pounds of direct materials. The direct material quantity variance for June is: $18,330 unfavorable. $20,680 favorable. $18,330 favorable. $20,680 unfavorable.

  5. Fausto Company employs a standard cost system in which direct materials inventory is carried at standard cost. The company has established the following standard for the materials costs of one unit of product: StandardQuantity StandardPrice StandardCost 3 pounds $  7.8/pound $23.4 During June, the company purchased 166,700 pounds of direct material at a total cost of $1,466,960. The company manufactured 47,200 units of product during June using 143,950 pounds of direct materials. The direct material quantity variance for June is: $18,330 unfavorable. $20,680 favorable. $18,330 favorable. $20,680 unfavorable. First, determine the standard quantity allowed as follows. Total units of 47,200 units × standard quantity of 3 pounds per unit = 141,600 pounds. Then, the direct material quantity variance is determined as follows. Materials quantity variance = SP × (AQ – SQ). Materials quantity variance = $7.80 × (143,950 – 141,600) = $18,330 (U).

  6. SU 7.5 Mix Variances Mix Variance – Isolates the effects of using the ACTUAL mix instead of the STANDARD mix. Mix variance = ATQ x (SPSM – SPAM) Actual Total Quantity x Std mix of inputs – Actual mix Favorable variances = Actual mix < Std mix

  7. SU 7.5 Yield Variances Yield Variance – Isolates the effects of differences between the ATQ of inputs and the STQ. Yield variance = (STQ – ATQ) x SPSM Std Total Qty - Actual Total Qty x Std mix of inputs Favorable variances = Actual Total Qty < Std Total Qty Review page 266

  8. SU 7.6 Overhead Variances Total Overhead Variance consists of four variances. • Total Variable overhead variances = flexible budget variance • Spending variance – difference between actual variable overhead and (budgeted application rate x the actual amount of input) • Variance is favorable if actual production spending < std spending • Efficiency variance – budgeted application rate times the difference between the actual input and the standard input allowed for actual output. • Total Fixed overhead variances • Spending Variances – difference between actual fixed overhead and the amount budgeted. Same as fixed overhead flexible budget variance. The fixed overhead is the same over the relevant range of output. • Production volume variance – (Idle capacity variance) difference between budgeted fixed overhead and the product of the budgeted application rate and the standard input allowed for the actual output. • Review page 269 Analysis of Overhead Variances

  9. Houghton Company maintains warehouses that stock items carried by its e-retailer clients. When one of Houghton's clients receives an order from an online customer, the order is forwarded to Houghton. Houghton then pulls the item from the warehouse, packs it and ships it to the customer. Houghton uses a predetermined variable overhead rate based on direct labor-hours. According to the company's records, .08 direct labor-hours are required to fulfill an order for one item and the variable overhead rate is $6.25 per direct-labor hour. During July, Houghton shipped 290,000 orders using 23,000 direct labor-hours. The company incurred a total of $141,450 in variable overhead costs. The variable overhead efficiency variance during July was: $2,300 unfavorable. $1,250 favorable. $2,300 favorable. $1,250 unfavorable.

  10. Houghton Company maintains warehouses that stock items carried by its e-retailer clients. When one of Houghton's clients receives an order from an online customer, the order is forwarded to Houghton. Houghton then pulls the item from the warehouse, packs it and ships it to the customer. Houghton uses a predetermined variable overhead rate based on direct labor-hours. According to the company's records, .08 direct labor-hours are required to fulfill an order for one item and the variable overhead rate is $6.25 per direct-labor hour. During July, Houghton shipped 290,000 orders using 23,000 direct labor-hours. The company incurred a total of $141,450 in variable overhead costs. The variable overhead efficiency variance during July was: $2,300 unfavorable. $1,250 favorable. $2,300 favorable. $1,250 unfavorable. The variable overhead (VOH) efficiency variance during July is determined as follows. VOH efficiency variance = SR (AH – SH).      VOH efficiency variance = $6.25 per hour (23,000 hours – 23,200 hours) = $1,250 (F).

  11. Problem 7.6 Water Control Systems manufactures water pumps and uses a standard cost system. The standard overhead costs per water pump are based on direct labor hours and are as follows: Variable overhead (4 hours at $8 per hour) $32 Fixed overhead (4 hours at $5* per hour) 20 Total overhead cost per unit $52 * Based on a capacity of 100,000 direct labor hours per month. The following information is available for the month of November: 22,000 pumps were produced although 25,000 had been scheduled for production. 94,000 direct labor hours were worked at a total cost of $940,000. The standard direct labor rate is $9 per hour. The standard direct labor time per unit is four hours. Variable overhead costs were $740,000. Fixed overhead costs were $540,000 Water Control’s variable overhead spending variance for November was A. $48,000 unfavorable. B. $60,000 favorable. C. $40,000 unfavorable. D. $12,000 favorable.

  12. Problem 7.6 Water Control’s variable overhead spending variance for November was  D. $12,000 favorable. The variable overhead spending variance is the difference between actual variable overhead and the variable overhead based on the standard rate and the actual activity level. Thus, the variable overhead spending variance was $12,000 favorable [(94,000 actual hours × $8 standard rate) – $740,000 actual cost]. A. $48,000 unfavorable. Answer A is incorrect. The variable overhead efficiency variance is $48,000 unfavorable. B. $60,000 favorable.  Answer B is incorrect. The variance of $60,000 favorable is based on 100,000 hours, not the actual hours of 94,000. C. $40,000 unfavorable.  Answer C is incorrect.The fixed overhead spending variance is $40,000 unfavorable.

  13. PROBLEM 7.6 #2 A fixed overhead volume variance based on standard direct labor hours measures  A. Deviation from standard direct labor hour capacity.   B. Deviation from the normal, or denominator, level of direct labor hours.  C. Fixed overhead use.  D. Fixed overhead efficiency.

  14. Problem 7.6 #2: A fixed overhead volume variance based on standard direct labor hours measures  B. Deviation from the normal, or denominator, level of direct labor hours.  The fixed overhead volume variance measures the effect of not operating at the budgeted (denominator) activity level. It is the difference between budgeted fixed costs and the product of the standard fixed overhead application rate and the standard activity level for the actual output. A favorable variance means that activity was greater than expected and that fixed overhead was overapplied. It might be caused by, for example, hiring more workers to provide an extra shift. An unfavorable volume variance means that activity was less than budgeted (overhead was underapplied), for example, because of insufficient sales or a labor strike. Accordingly, the volume variance is usually outside the control of production management. Moreover, unlike other variances, it does not directly reflect a difference between actual and budgeted expenditure of resources. A. Deviation from standard direct labor hour capacity. Answer A is incorrect. The volume variance is not related to direct labor.   C. Fixed overhead use.  Answer C is incorrect.The volume variance is not related to overhead use. D. Fixed overhead efficiency. Answer D is incorrect.The volume variance is not related to overhead efficiency.

  15. Problem 7.6 #3 Nanjones Company manufactures a line of products distributed nationally through wholesalers. Presented below are planned manufacturing data for the year and actual data for November of the current year. The company applies overhead based on planned machine hours using a predetermined annual rate. A. $6,000 unfavorable. B. $6,000 favorable.  C. $2,000 favorable.  D. $14,000 unfavorable.

  16. Problem 7.6 #3 Answer C. $2,000 favorable. Answer C is correct.The variable overhead spending variance equals the difference between actual variable overhead and the product of the actual input and the budgeted application rate. At a variable overhead application rate (standard cost) of $10 per machine hour ($2,400,000 ÷ 240,000 hours), the total standard cost for the 21,600 actual hours was $216,000. Given actual costs of $214,000, the favorable variance is $2,000. Answer A is incorrect.The variance is favorable. Answer B is incorrect.The amount of $6,000 is based on planned machine hours of 22,000. Answer D is incorrect.The variance is favorable.

  17. Problem 7.7

  18. Problem 7.7 – Calculate the following: • 1) Material Price Variance AQ x (SP-AP) • 2) Material Quantity Variance (SQ-AQ) x SP • 3) Labor Rate Variance AQ x (SP-AP) • 4) Labor Efficiency Variance (SQ-AQ) x SP • 5) Variable Overhead Spending Variance (AQxSP)-AC • 6) Variable Overhead Efficiency Variance(SQ-AQ)xSP • 7) Fixed Overhead Spending Variance • Flexible/Static budget – Actual costs incurred • 8) Fixed Overhead Efficiency Variance • (Std hours allowed for actual outputs x Std rate) x Flexible/Static budget

  19. SU 7.8 Sales Variances Single Product Sales Variances • Evaluating the production and selling functions. • Differences are either price variance or volume variance • Sales volume variance = Sum of the sales quantity and mix variance • For a single product the sales mix variance is zero.

  20. SU 7.8 Sales Variances Multiproduct Sales Price Variance • Used with two more products. • Calculate as single and add the results • Or - • Multiply the actual total units sold x the difference between: • the weighted-average price based on actual units sold at actual unit price and the weighted-average price based on actual units sold at budgeted prices.

  21. SU 7.8 Sales Variances Multiproduct Sales Quantity Variance • Used with two more products. • Calculate as single and add the results • Or - • Calculate the difference between: • Actual total unit sales x the budgeted weighted-average UCM for the actual mix. • Budgeted total unit sales times the budgeted weighted-average UCM for the budgeted mix. • Can be separated into Sales quantity and Sales mix variances.

  22. SU 7.8 Sales Variances Sales quantity variances BCM based on Actual Unit Sales – BCM based on Budgeted Unit Sales Sales mix variances Actual units sold - BCM based on Actual mix – BCM for the budgeted mix and actual total unit sales. Review page 273.

  23. Problem Review Page 288 #37 Page 286 #38

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