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Part $1$

McKnight Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system. McKnight allocates overhead based on yards of direct materials. The$$ company's performance report includes the following selected$$ data:

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Static Budget $(1,000$ recliners$)$

Actual Results $(980$ recliners$)$

Sales

$(1,000$ recliners x $$500$ each$)$

$$500,000$

$(980$ recliners x $$495$ each$)$

$$485,100$

Variable Manufacturing Costs:

Direct Materials

$(6,000$ yds$.$ @ $$8\mathrm{.}80/$ yd$.)$

$52,800$

$(6,143$ yds$.$ @ $$8\mathrm{.}60/$ yd$.)$

$52,830$

Direct Labor

$(10,000$ DLHr @ $$11\mathrm{.}80/$ DLHr$)$

$118,000$

$(9,600$ DLHr @ $$12\mathrm{.}00/$ DLHr$)$

$115,200$

Variable Overhead

$(6,000$ yds$.$ @ $$5\mathrm{.}20/$ yd$.)$

$31,200$

$(6,143$ yds$.$ @ $$6\mathrm{.}60/$ yd$.)$

$40,544$

Fixed Manufacturing Costs:

Fixed Overhead

$60,600$

$62,600$

Total Cost of Goods Sold

$262,600$

$271,174$

Gross Profit

$$237,400$

$$213,926$

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Part $1$

Requirement $1.$ Prepare a flexible budget based on the actual number of recliners sold. $($Round budget amounts per unit to the nearest$$ cent.$)$

McKnight Recliners

Flexible Budget

Budget

Amounts

per Unit

Actual Units $($Recliners$)$

Sales Revenue

Variable Manufacturing Costs:

Direct Materials

Direct Labor

Variable Overhead

Fixed Manufacturing Costs:

Fixed Overhead

Total Cost of Goods Sold

Gross Profit

Part $2$

Requirement $2.$ Compute the cost variance and the efficiency variance for direct materials and for direct labor. For manufacturing$$ overhead, compute the variable overhead$$ cost$,$ variable overhead$$ efficiency, fixed overhead$$ cost$,$ and fixed overhead volume variances. Round to the nearest dollar.

Begin with the cost variances. Select the required$$ formulas, compute the cost variances for direct materials and direct$$ labor, and identify whether each variance is favorable$($F$)$ or unfavorable$($U$).($Round your answers to the nearest whole dollar. Abbreviations$$ used: AC$=$ actual$$ cost; AQ$=$ actual$$ quantity; FOH$=$ fixed$$ overhead; SC$=$ standard$$ cost; SQ$=$ standard$$ quantity.$)$

Formula

Variance

Direct materials cost variance

$=$

$=$

Direct labor cost variance

$=$

$=$

Part $3$

Next compute the efficiency variances. Select the required$$ formulas, compute the efficiency variances for direct materials and direct$$ labor, and identify whether each variance is favorable$($F$)$ or unfavorable$($U$).($Round your answers to the nearest whole dollar. Abbreviations$$ used: AC$=$ actual$$ cost; AQ$=$ actual$$ quantity; FOH$=$ fixed$$ overhead; SC$=$ standard$$ cost; SQ$=$ standard$$ quantity.$)$

Formula

Variance

Direct materials efficiency variance

$=$

$=$

Direct labor efficiency variance

$=$

$=$

Part $4$

Now compute the variable overhead cost and efficiency variances. Select the required$$ formulas, compute the variable overhead cost and efficiency$$ variances, and identify whether each variance is favorable$($F$)$ or unfavorable$($U$).($Round your answers to the nearest whole dollar. Abbreviations$$ used: AC$=$ actual$$ cost; AQ$=$ actual$$ quantity; FOH$=$ fixed$$ overhead; SC$=$ standard$$ cost; SQ$=$ standard$$ quantity; VOH$=$ variable$$ overhead.$)$

Formula

Variance

VOH cost variance

$=$

$=$

VOH efficiency variance

$=$

$=$

Part $5$

Now compute the fixed overhead cost and volume variances. Select the required$$ formulas, compute the fixed overhead cost and volume$$ variances, and identify whether each variance is favorable$($F$)$ or unfavorable$($U$).($Round your answers to the nearest whole dollar. Abbreviations$$ used: AC$=$ actual$$ cost; AQ$=$ actual$$ quantity; FOH$=$ fixed$$ overhead; SC$=$ standard$$ cost; SQ$=$ standard$$ quantity.$)$

Formula

Variance

FOH cost variance

$=$

$=$

FOH volume variance

$=$

$=$

Part $6$

Requirement $3.$ Have McKnight$\text{'}$s managers done a good job or a poor job controlling$$ materials, labor, and overhead$$ costs? Why?

The variances computed in Requirement $2$ suggest that the managers have done a

$$

good

poor

reasonable

job controlling materials and labor costs. The

$$

favorable

unfavorable

direct materials cost variance and direct labor efficiency variance help offset the

$$

favorable

unfavorable

direct labor cost variance and direct materials efficiency variance. Managers have done a

$$

good

poor

reasonable

job controlling overhead costs as evidenced by the fact that

$$

all

none

some

of the overhead variances are

$$

favorable

unfavorable

$.$

Part $7$

Requirement $4.$ Describe how McKnight$\text{'}$s managers can benefit from the standard costing system.

Standard costing helps managers do the$$ following: