MacGyver Corporation manufactures a product called Miracle Goo, which comes in h

Question

MacGyver Corporation manufactures a product called Miracle Goo, which comes in handy for just about anything. The thick tarry substance is sold in six- gallon drums. Two raw materials are used; these are referred to by people in the business as A and B. Two types of labor are required also. These are mixers (labor class D and packers (abor class I You were recently hired by the company president, Pete Thorn, to be the controller. You soon learned that MacGyver uses a standard-costing system. Variances are computed and closed into Cost of Goods Sold monthly. After your first month on the job, you gathered the necessary data to compute the month's variances for direct material and direct labor. You finished everything up by 5:00 p.m. on the 31st, including the credit to Cost of Goods Sold for the sum of the variances. You decided to take all your notes home to review them prior to your formal presentation to Thorn first thing in the morning. As an afterthought, you grabbed a drum of Miracle Goo as well, thinking it could prove useful in some unanticipated way. You spent the evening boning up on the data for your report and were ready to call it a night. As luck would have it though, you knocked over the Miracle Goo as you rose from the kitchen table. The stuff splattered everywhere, and, most unfortunately, obliterated most of your notes. All that remained legible is the following information. Material A: Quantity Direct Material B: Purchase Variance Price Variance 2,000 1,000 Direct Labor I: Efficiency Variance Direct Labor I: Rate Variance 400 1,200 Cost of Goods Sold Accounts Payable 146,000 1100 Beg bal. 66,000 1,400 53,000 14,100 End. bal. Other assorted data gleaned from your notes The standards for each drum of Miracle Goo include 14 pounds of material A at a standard price of $4 per pound. . The standard cost of material B is $15 for each drum of Miracle Goo. . Purchases of material A were 10,000 pounds at $3.50 per pound Given the actual output for the month, the standard allowed quantity of material A was 18,200 pounds. The standard allowed quantity of material B was 6,500 gallons. Although 10,000 gallons of B were purchased, only 6,300 gallons were used The standard wage rate for mibxers is $15 per hour. The standard labor cost per drum of product for mixers is $30 per drum. The standards allow 3 hours of direct labor I (packers) per drum of Miracle Goo. The standard labor cost per drum of product for packers is $36 per drum. Packers were paid $11.90 per hour during the month.

Explanation / Answer

As per the facts given in question, it is coming up with two interpretations

1) If we calculate the actual output, i.e.

No. of drums sold= standard Cost Of goods Sold / Standard Cost per unit

= $146000 / $137*

= 1065.69 Drums

* Standard cost per unit/ drum= standard cost (material A + material B + Labour I +Labour II)

= (14pound* $4 + $15 + $36 + $30)

= $ 137/ drum

and since there are no opening and closing stock of finished goods, therefore 1065.69 drums are actually produced and sold.

2) Where as it is given in question that standard allowable quantity of material A for actual output is 18200 pounds.

and Standard quantity per drum is 14 pound for material A..according to which

Actual output/ drum= 18200pound / 14 pound

= 1300 drums

So data is not proper & it is not clear how many drums to be considered as actual output i.e 1300 or 1065.79 drums.

Additional- In Standard costing variances are computed between the difference of standard and actual of material and labour used in actual output / finished good produced. There is no use of standard set for finished good. All the variances are to be computed for actual output produced.

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