Standard Costing: Ultra, Inc. manufactures and sells a full line of sunglasses.
ID: 2525863 • Letter: S
Question
Standard Costing:
Ultra, Inc. manufactures and sells a full line of sunglasses. The company uses a standard cost system. Department managers' are held responsible for the explanation of the variances in their department performance reports. Recently, the variances in the Prestige line of sunglasses have been of concern. Data for the month of August is presented below. Assume beginning and ending inventory levels for WiP and FG are zero.
Static Budget
Actual
revenues
$600,000
$625,000
DM
$150,000
$163,400
DL
$135,000
$138,700
FOH (cost driver = DL hours)
$114,000
$121,000
gross profit
$201,000
$201,900
selling price per Prestige sunglass
$76.92
$76.22
DM (total # ounces)
15,600
16,100
DL rate ($ per DL hour)
$18.00
$19.55
1-Prepare the journal entry for the purchase of DM. Assume DM ourchases = DM used.
-DM inventory
-DM spending Variance
-Accounts payable
2-Prepare the journal entry for the release of DM into production.
-WiP inventory
-DM efficiency variance
-DM inventory
3-Prepare the journal entries for DL.
A –
-DL expense
-Wage payable.
B-
-WiP inventory
-DL efficiency variance
-DL spending variance
-DL expense
4-Prepare the journal entries for FOH.
A-
-FOH expenses
-accounts payable
B-
-mfg FOH control
- FOH expenses
C-
-WIP inventory
-mfg OH control
D-
-mfg FOH control
-FOH volume variance
-FOH spending Variance
5-Prepare the adjusting entries to close out the variance accounts
DM spending variance
CGS
DM efficiency variance
CGS
DL spending variance
CGS
DL efficiency variances
CGS
FOH volume variance
CGS
FOH spending variance
CGS
Static Budget
Actual
revenues
$600,000
$625,000
DM
$150,000
$163,400
DL
$135,000
$138,700
FOH (cost driver = DL hours)
$114,000
$121,000
gross profit
$201,000
$201,900
selling price per Prestige sunglass
$76.92
$76.22
DM (total # ounces)
15,600
16,100
DL rate ($ per DL hour)
$18.00
$19.55
Explanation / Answer
Journal S.No detail Particulars Debit Credit Working note 1 Purchase of direct material Direct material Inventory $154,807 Direct material spending variance = (Actual price - standard price) x Actual quantity Direct material spending variance $8,593 $163,400 ($10.1490 - $9.6153) x 16100 = $8593 Accounts payable 2 for the release of DM into production WIP inventory $150,000 DM efficiency variance = (Actual quantity - Standard quantity) x standard rate DM efficiency variance $4,807 (16100 - 15600) x 9.6153 = $4807 DM inventory $154,807 3 entries for DL DL expenses $138,700 Wages payable $138,700 4 entry for wip WIP Inventory $135,000 (a) DL efficiency variance = (Actual hour - standard hour)x Standard rate DL efficiency variance $7,925 (7094.6291 - 7500) x $19.55= $7925 Favourable DL spending variance $11,625 (b)DL spending variance = (AR - SR) x standard hrs. DL expenses $138,700 ($19.55 - $18) x 7500 = $11625 5 entry for FOH FOH expenses $121,000 Accounts payable $121,000 Mfg FOH control $7,000 Mfg FOH c = Actual overhead - Standard ovhd FOH expenses $7,000 = 121000 - 114000 = $7000 WIP inventory $114,000 Mfg FOH control $114,000 Mfg FOH Control $7,000 FOH volume variance = (Standard hour allowed x overhead rate) - overhead charged to production FOH volume variance $6,500 (7500 x 17) - 121000 = $6500 FOH spending variance $13,500 FOH spending variance = Standard hour worked (Actual overhead rate - standard overhead rate) 7500 ($17 - $15.20) = $13500 6 Adjustment entries to close out the variance account (a)M spending variance $8,953 cost of goods sold $8,953 DM efficiency variance $4,807 CGS $4,807 DL spending variance $11,625 CGS $11,625 DL efficiency variance $7,925 CGS $7,925 FOH volume variance $6,500 CGS $6,500 FOH spending variance $13,500 CGS $13,500
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