PROBLEM SET C

PROBLEM 24-1C Philly Company set the following standard unit costs for its single product:

Direct material (10 lbs. @ $2 per lb.) $ 20.00Direct labor (2 hrs. @ $11 per hr.) 22.00Factory overhead — Variable (2 hrs. @ $5 per hr.) 10.00Factory overhead — Fixed (2 hrs. @ $22.50 per hr.) 45.00Total standard cost $97 .00

The predetermined overhead rate is based on a planned operating volume of 75% of the productive capacity of 80,000 units per quarter. The following flexible budget information is available:

Operating Levels 50% 75% 100%

Production in units 40,000 60,000 80,000Standard direct labor hrs. 800,000 120,000 160,000Budgeted overhead Fixed factory overhead $2,700,000 $2,700,000 $2,700,000 Variable factory overhead $400,000 $600,000 $800,000

During the current quarter, the company operated at 100% of capacity and produced 80,000 units of product; actual direct labor totaled 300,000 hours. Units produced are assigned the following standard costs:

Direct materials (800,000 lbs. @ $2 per lb.) $1,600,000Direct labor (160,000 hrs. @ $11 per hr.) 1,760,000Factory overhead (160,000 hrs. @ $25 per hr.) 4,000,000 Total standard cost $7,360,000

Actual costs incurred during the current quarter follow:Direct materials (790,000 lbs. @ $2.20) $ 1,738,000Direct labor (150,000 hrs. @ $11.50) 1,725,000Fixed factory overhead costs 2,752,000Variable factory overhead costs 850,000Total actual costs $7,065,000

Required1. Compute the direct materials cost variance, including its price and quantity variances.2. Compute the direct labor variance, including its rate and efficiency variances.3. Compute (a) the variable overhead spending and efficiency variances, (b) the fixed overhead spending and volume variances, and (c) the total overhead controllable variance.

PROBLEM 24-2C

Douglas Publishing Company’s 2008 master budget included the following fixed budget performance report. It is based on expected production and sales volume of 11,000 units.

DOUGLAS PUBLISHING COMPANYFixed Budget Performance Report

For Year Ended December 31, 2008

Sales $1,265,000Cost of goods sold  Direct materials $352,000  Direct labor 209,000  Repairs (variable cost) 38,500  Depreciation — Equipment 75,000  Utilities($1 per unit is variable) 31,000  Plant management salaries 95,000 800,500Gross profit $464,500Selling expenses  Packaging 22,000  Shipping 5,500  Sales commissions 55,000 82,500General and administrative expenses  Advertising expense 49,000  Salaries 195,000 244,000 Income from operations $138,000

Required1. Classify all items listed in the fixed budget as either variable or fixed. Also determine their amounts per unit or their amounts for the year, as appropriate.2. Prepare flexible budgets (see Exhibit 24.3) for the company at sales volumes of 9,000 and 15,000 units.3. The company’s business conditions are improving. One possible result is a sales volume of  approximately 20,000 units. The company president is confident that this volume is within the relevant range of existing capacity. How much will operating income increase over the 2008 budgeted amount of $138,000 if this level is reached without increasing capacity. 4.  An unfavorable change in business is remotely possible: in this case, production and sales volume for 2005 could fall to 5,000 units. How much income (or loss) from operations would occur if sales volume falls to this level?

PROBLEM 24-3C

Refer to information in Problem 24-2C. Douglas Publishing Company’s actual income statement for 2008 follows:

DOUGLAS PUBLISHING COMPANYStatement of Income from OperationsFor Year Ended December 31, 2008

Sales (15,000 units) $1,693,000Cost of goods sold  Direct materials $590,000  Direct labor 255,000  Repairs (variable cost) 135,000  Depreciation —Equipment 75,000  Utilities (fixed cost is $1 per unit) 33,000  Plant management salaries 95,000 1,183,000 Gross profit $1,411,500Selling expenses  Packaging 33,000  Shipping 9,500  Sales commissions 75,000 117,500General and administrative expenses  Advertising expense 149,000  Salaries 182,000 331,000 Income from operations $ 61,500

Required

1. Prepare a flexible budget performance report for 2008.

Analysis Component

2. Analyze and interpret both the (a) sales variance and (b) direct materials variance.

PROBLEM 24-4C

SVC Inc. has set the following standard costs for one unit of its product:Direct material (5 lbs @ $2 per lb) $10.00Direct labor (3 hrs. @ $15 per hr.) 45.00Overhead (3hrs. @ $33 per hr.) 99.00 Total standard cost $154.00

The predetermined overhead rate ($33 per direct labor hour) is based on an expected volume of 60% of the factory’s capacity of 12,000 units per month. Following are the company’s budgeted overhead costs per month at the 60% level:

Overhead Budget (60% capacity)Variable overhead costs  Indirect materials $ 57,000  Indirect labor 160,000

  Power 95,000  Repairs and maintenance 120,000  Total variable overhead costs $432,000Fixed overhead costs  Depreciation — Building 30,000  Depreciation — Machinery 75,000  Taxes and insurance 36,000  Supervision 139,800  Total fixed overhead costs 280,800 Total overhead costs $712,800

The company incurred the following actual costs when it operated at 60% of capacity in October:

Direct materials (38,000 lbs. @ $2.25 per lb.) $ 85,500Direct labor (20,700 hrs. @ $14 per hr.) 289,800Overhead costs  Indirect materials $ 58,300  Indirect labor 151,000  Power 107,000  Repairs and maintenance 94,000  Depreciation — Building 30,000  Depreciation — Machinery 75,000  Taxes and insurance 37,800  Supervision 161,000 714,100 Total costs $1,089,400

Required1. Examine the monthly overhead budget to (a) determine the costs per unit for each variable overhead item and its total per unit costs, and (b) identify the total fixed costs per month.2. Prepare flexible overhead budgets (as in Exhibit 24.12) for October showing the amounts of each variable and fixed cost at the 50%, 60%, and 70% capacity levels.3. Compute the direct materials cost variance, including its price and quantity variances.4. Compute the direct labor cost variance, including its rate and efficiency variances.5. Compute the (a) variable overhead spending and efficiency variances, (b) fixed overhead spending and volume variances, and (c) total overhead controllable variance.6. Prepare a detailed overhead variance report (as in Exhibit 24.19) that shows the variances for individual items of overhead.

PROBLEM 24-5CThe Johnson Company has set the following standard costs per unit for the product it manufactures:

Direct material (10 lbs. @ $3 per lb.) $ 30.00Direct labor (1 hrs. @ $17 per hr.) 17.00Overhead (1 hrs. @ $6 per hr.) 6 .00 Total standard cost $53 .00

The predetermined overhead rate is based on a planned operating volume of 100% of the productive capacity of 15,000 units per month. The following flexible budget information is available:

Operating Levels70% 80% 90%

Production in units 10,500 12,000 13,500Standard direct labor hours 10,500 12,000 13,500Budgeted overhead  Variable overhead costs    Indirect materials $4,200 $4,800 $5,400    Indirect labor 21,000 24,000 27,000    Power 6,300 7,200 8,100    Maintenance 1,050 1,200 1,350     Total variable costs $32,550 $37,200 $41,850  Fixed overhead costs    Rent of factory building $20,000 $20,000 $20,000    Depreciation — Machinery 5,500 5,500 5,500    Supervisory salaries 18,000 18,000 18,000     Total fixed costs $43,500 $43,500 $43,500   Total overhead costs $76,050 $80,700 $85,350

During May of this year, the company operated at 80% of capacity and produced 12,000 units, incurring the following actual costs:

Direct materials (111,000 lbs. @ $3.20 per lb.) $355,200Direct labor (12,650 hrs. @ $18.00 per hr.) 227,700Overhead costs  Indirect materials $5,000  Indirect labor 25,040  Power 7,800  Maintenance 1,060  Rent of factory building 20,000  Depreciation — Machinery 5,500  Supervisory salaries 19,100 83,500 Total costs $666,400

Required1. Compute the direct materials variance, including its price and quantity variances.2. Compute the direct labor variance, including its rate and efficiency variances.3. Compute (a) the variable overhead spending and efficiency variances, (b) the fixed overhead spending and volume variances, and (c) the total overhead controllable variance.4. Prepare a detailed overhead variance report (as in Exhibit 24.19) that shows the variances for individual items of overhead.

PROBLEM 24-6C

Hughes Company’s standard cost accounting system recorded the following information from its December operations:

Standard direct materials cost $287,000  Direct materials quantity variance (unfavorable) 8,600  Direct materials price variance (unfavorable) 2,000Actual direct labor cost 522,300  Direct labor efficiency variance (unfavorable) 4,400  Direct labor rate variance (favorable) 10,600Actual overhead cost 110,000  Volume variance (unfavorable) 3,000  Controllable variance (favorable) 1,500

Required

1. Prepare December 30 journal entries to record the company’s costs and variances for the month.Analysis Component2. Identify the areas that would attract the attention of a manager who uses management by exception. Explain what action(s) the manager should consider.