Question
A company keeps no Work in Process inventories. At the beginning of 2020, the company had no beginning Finished Goods Inventory. The company had budgeted
A company keeps no Work in Process inventories. At the beginning of 2020, the company had no beginning Finished Goods Inventory. The company had budgeted production and sales of 12,000 units for 2020. This amount is also the denominator level for 2020. Actual production for 2020 is 10,000 units, and actual sales for the year were 9,500 units. The company purchased and used the same amount of direct materials during the year. The actual selling price for 2020 was $130 per unit. At the end of 2020, any adjustments are closed totally to Cost of Goods Sold. Unit production costs using standard costing and actual costing are as follows for 2020:
When using standard absorption costing, the company has the following variances for 2020:
Materials Price Variance | $ 3,900 unfavorable | Variable Overhead Spending Variance | $51,000 unfavorable |
Materials Quantity Variance | $ 4,000 favorable | Variable Overhead Efficiency Variance | $10,000 favorable |
Labor Rate Variance | $17,000 favorable | Fixed Overhead Budget Variance | $ 9,000 favorable |
Labor Efficiency Variance | $20,000 favorable | Fixed Overhead Production Volume Var. | 54,000 Unfav |
For all costing methods, overhead is charged to production on the basis of direct labor hours. The standard for labor usage is 1.8 hours per unit, but the actual labor usage was 1.7 hours per unit. For both fixed and variable overhead, you may assume that the predetermined overhead rates PER HOUR are the same for both normal costing and standard costing. The predetermined rates PER UNIT will not be the same for both normal and standard costing, since normal costing charges overhead costs based on actual hours and standard costing charges overhead costs based on standard hours. Actual period expenses (marketing, distribution, and customer service expenses) are $90,000 fixed per year and $14 variable per unit sold.
Prepare 4 income statements:
1. Normal absorption costing 2. Normal variable costing
3. Standard absorption costing 4. Standard variable costing
Notice that you are charging overhead to production based on direct labor hours, not units. So, using normal costing you are going to have to compute the underallocated or overallocated overhead based on the actual hours used to produce the actual units. As noted earlier, the predetermined overhead rates per hour will be the same for both normal and standard costing, but not per unit.
Direct Materials Direct Labor Variable Overhead Fixed Overhead Standard Cost per Unit $16.00 $36.00 $18.00 $27.00 Actual Cost per Unit $15.99 $32.30 $22.10 $31.50 Use this format for the absorption costing income statements. Sales Finished Goods, beginning Cost of Goods Manufactured Cost of Goods Available for Sale Finished Goods, ending Unadjusted Cost of Goods Sold Adjustment: Adjusted Cost of Goods Sold Gross Profit Variable Selling Expenses Fixed Selling Expenses Total selling expenses NET OPERATING INCOME (ABSORPTION) Use this format for the Variable Costing income statements. Sales Finished Goods, beginning Cost of Goods Manufactured Cost of Goods Available for Sale Finished Goods, ending Unadjusted Variable Cost of Goods Sold Adjustment: Adjusted Variable Cost of Goods Sold Manufacturing Margin Variable Selling Expenses Contribution Margin Fixed Overhead Fixed Selling Expenses Total Fixed Expenses NET OPERATING INCOME (VARIABLE) Direct Materials Direct Labor Variable Overhead Fixed Overhead Standard Cost per Unit $16.00 $36.00 $18.00 $27.00 Actual Cost per Unit $15.99 $32.30 $22.10 $31.50 Use this format for the absorption costing income statements. Sales Finished Goods, beginning Cost of Goods Manufactured Cost of Goods Available for Sale Finished Goods, ending Unadjusted Cost of Goods Sold Adjustment: Adjusted Cost of Goods Sold Gross Profit Variable Selling Expenses Fixed Selling Expenses Total selling expenses NET OPERATING INCOME (ABSORPTION) Use this format for the Variable Costing income statements. Sales Finished Goods, beginning Cost of Goods Manufactured Cost of Goods Available for Sale Finished Goods, ending Unadjusted Variable Cost of Goods Sold Adjustment: Adjusted Variable Cost of Goods Sold Manufacturing Margin Variable Selling Expenses Contribution Margin Fixed Overhead Fixed Selling Expenses Total Fixed Expenses NET OPERATING INCOME (VARIABLE)Step by Step Solution
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