Basic Variance Analysis, Revision of Standards, Journal Entries Petrillo Company produces engine parts for large motors. The company uses a standard cost system for production costing and control. The standard cost sheet for one of its higher volume products (a valve) is as follows: $37.80 Direct materials (7 lbs. O $5.40) Direct labor (1.75 hrs. $18) Variable overhead (1.75 hrs 54.00) 31.50 7.00 Fixed overhead (1.75 hrs. $3.00) 5.25 Standard cost per unit $81.55 During the year, Petrillo had the following activity related to valve production a Production of valves totaled 20,600 units b. A total of 135,600 pounds of direct materials was purchased at 55,36 per pound c. There were 10,000 pounds of direct materials in beginning inventory carried at $5.40 per pound). There was no ending inventory d. The company used 36,500 direct labor hours at a total cost of $656,270. Actual fixed overhead totaled $110,000 Actual variable overhead totaled $168,000 Petrillo produces all of its valves in a single plant. Normal activity is 20,000 units per year. Standard overhead rates are computed based on normal activity measured in standard direct labor hours. Required: 1. Compute the direct materials price and usage variances MPV 5,424 Favorable MUV 6,480 X Unfavorable 2. Compute the direct labor rate and efficiency variances 2. Compute the direct labor rate and efficiency variances. Labor Rate Variance 730 Favorable Labor Efficiency Variance 8,100 Unfavorable 3. Compute overhead variances using a two-variance analysis Budget Variance 28,800 Unfavorable Volume Variance 36,500 Favorable 4. Compute overhead variances using a four-variance analysis Variable overhead spending variance 22,000 Variable overhead efficiency variance 1,800 Unfavorable Unfavorable Fixed overhead spending variance 5,000 Unfavorable Fixed overhead volume variance 3,150 Favorable 5. Assume that the purchasing agent for the valve plant purchased a lower quality direct material from a new supplier. Would you recommend that the company continue to use this cheaper direct material? No Feedback Check My Wor 1. MPV (Materials price variance) - (AP-SP) XAQ MUV (Materials usage variance) - (AQ - SQ) SP 2. LRV (Labor rate variance) - (AR-SR) XAH LEV (Labor efficiency variance) - (AH - SH) X SR 3. Compute overhead variances using a two variance analysis Budget Variance 28,800 Unfavorable Favorable Volume Variance 36,500 X 4. Compute overhead variances using a four-variance analysis Variable overhead Spending variance 22,000 Unfavorable Unfavorable 1,800 Variable overhead efficiency variance Fixed overhead spending variance Fixed overhead volume variance 5,000 Unfavorable 3,150 Favorable 5. Assume that the purchasing agent for the valve plant purchased a lower-quality direct material from a new supplier. Would you recommend that the company continue to use this cheaper direct material? NO Fech Check My Work 1. MPV (Materials price variance) - (AP-SP) XAQ MUV (Materials usage variance) (AQ - 50) SP 2. LRV (Labor rate variance) - (AR-SR) XAH LEV (Labor efficiency variance) - (AH - SH) SR 3. The two- and three-variance analyses do not require knowledge of actual variable and actual fixed overhead 4. The four-variance method calculates two variances for variable overhead and two variances for fred overhead. S. Consider the ethics of this question and discuss
