Problem 9.

32

Basic Variance Analysis, Revision of Standards, Journal Entries

Objective 1, 2, 3, 4

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:

During the year, Petrillo had the following activity related to valve production:

a. Production of valves totaled 20,600 units.

b. A total of 135,400 pounds of direct materials was purchased at $5.36 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.
e. Actual fixed overhead totaled $110,000.
f. 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 = (AP – SP) x AQ
MPV = ($ 5.36 – $ 5.40) x 135,400 = $ 5,416  Favorable

MUV = (AQ – SQ) x SP

MUV = ((10,000 +135,400) – 144,200) x $ 5.40
= (145,400 – 144,200) x $ 5.40 = $ 6,480  Unfavorable

2. Compute the direct labor rate and efficiency variances.

LRV = (AR – SR) x AH
LRV = ($17.98 – $18.00) x 36,500 = $730  Favorable

LEV = (AH – SH) x SR

LEV = (36,500 – 36,050) x $18 = $8,100  Unfavorable
3. Compute overhead variances using a two-variance analysis.

Actual Overhead Budgeted Fixed Applied Overhead

= $278,000 Overhead + (SFOR + SVOR) x SH
(SVOR × SH) = $252,350
= $249,200

Budget Volume
Variance Variance
$28,800  Unfavorable $3,150  Favorable

Budgeted fixed overhead = $3.00 × (1.75 × 20,000) = $105,000

SVOR × SH = $4.00 × (1.75 × 20,600) = $144,200
Applied overhead = $7.00 × (1.75 × 20,600) = $252,350

4. Compute overhead variances using a four-variance analysis.

Variable overhead variances:

Actual Variable Budgeted Variable Applied Variable

Overhead Overhead Overhead
= $168,000 SVOR × AH SVOR × SH
= $4.00 × 36,500 = $4.00 × 36,050
= $146,000 = $144,200

Spending Efficiency
Variance Variance
$22,000  Unfavorable $1,800  Unfavorable

Fixed overhead variances:

Actual Fixed Budgeted Fixed Applied Fixed

Overhead Overhead Overhead
= $110,000 SFOR × AH SFOR × SH
= $3.00 × (1.75 × 20,000) = $3.00 × (1.75 × 20,600)
= $105,000 = $108,150

Spending Volume
Variance 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? If so, what standards would likely need revision to reflect this decision? Assume
that the end product's quality is not significantly affected.

Perusahaan harus menghentikan pembelian direct materials yang kualitasnya rendah, karena
menyebabkan cost menjadi tinggi.
Biaya direct materials yang dianggarkan pada tingkat produksi 20.600 unit adalah sebesar
$ 778.680 ($ 5.40 × 7 × 20.600), dan actual costnya adalah $ 779.744 ($ 725.744 + $ 54.000).
Besarnya biaya ini disebabkan oleh varians penggunaan yang besar dan unfavorable, mungkin
disebabkan oleh kualitas dari direct materials yang rendah. Kemudian, unfavorable varians
efisiensi dari direct labors dapat disebabkan oleh direct materials yang kualitas mutunya rendah.

6. Prepare all possible journal entries (assuming a four-variance analysis of overhead variances).

Materials 731,160
Direct Materials Price Variance 5,416
Accounts Payable 725,744

Work in Process 778,680

Direct Materials Usage Variance 6,480
Materials 785,160

Work in Process 648,900

Direct Labor Efficiency Variance 8,100
Direct Labor Rate Variance 730
Wages Payable 656,270

Cost of Goods Sold 13,850

Direct Labor Rate Variance 730
Direct Materials Usage Variance 6,480
Direct Labor Efficiency Variance 8,100

Direct Materials Price Variance 5,416

Cost of Goods Sold 5,416

Variable Overhead Control 168,000

Miscellaneous Accounts 168,000

Fixed Overhead Control 110,000

Miscellaneous Accounts 110,000

Work in Process 144,200

Variable Overhead Control 144,200

Work in Process 108,150

Fixed Overhead Control 108,150
 Variable Overhead Spending Variance 22,000
Variable Overhead Efficiency Variance 1,800
Fixed Overhead Spending Variance 5,000
Fixed Overhead Volume Variance 3,150
Fixed Overhead Control 1,850
Variable Overhead Control 23,800

Cost of Goods Sold 28,800

Variable Overhead Efficiency Variance 1,800
Fixed Overhead Spending Variance 5,000
Variable Overhead Spending Variance 22,000

Fixed Overhead Volume Variance 3,150

Cost of Goods Sold 3,150

Problem 9.39

Standard Costing: Planned Variances

As part of its cost control program, Tracer Company uses a standard costing system for all
manufactured items. The standard cost for each item is established at the beginning of the fiscal
year, and the standards are not revised until the beginning of the next fiscal year. Changes in costs,
caused during the year by changes in direct materials or direct labor inputs or by changes in the
manufacturing process, are recognized as they occur by the inclusion of planned variances in
Tracer's monthly operating budgets.

The following direct labor standard was established for one of Tracer's products, effective June 1,
2012, the beginning of the fiscal year:

The standard was based on the direct labor being performed by a team consisting of five persons
with Assembler A skills, three persons with Assembler B skills, and two persons with machinist skills;
this team represents the most efficient use of the company's skilled employees. The standard also
assumed that the quality of direct materials that had been used in prior years would be available for
the coming year.

For the first seven months of the fiscal year, actual manufacturing costs at Tracer have been within
the standards established. However, the company has received a significant increase in orders, and
there is an insufficient number of skilled workers to meet the increased production. Therefore,
beginning in January, the production teams will consist of eight persons with Assembler A skills, one
person with Assembler B skills, and one person with machinist skills. The reorganized teams will
work more slowly than the normal teams, and as a result, only 80 units will be produced in the
same time period in which 100 units would normally be produced. Faulty work has never been a
cause for units to be rejected in the final inspection process, and it is not expected to be a cause for
rejection with the reorganized teams.

Furthermore, Tracer has been notified by its direct materials supplier that lower-quality direct
materials will be supplied beginning January 1. Normally, one unit of direct materials is required for
each good unit produced, and no units are lost due to defective direct materials. Tracer estimates
that 6 percent of the units manufactured after January 1 will be rejected in the final inspection
process due to defective direct materials.

Required:

1. Determine the number of units of lower quality direct materials that Tracer Company must
enter into production in order to produce 47,000 good finished units.
Tracer membuat estimasi 6% barang reject
Total Unit yang diproduksi = FG/(1-6%)
= 47,000 /0.94
= 50,000 unit
Atas pesanan 47,000, Tracer harus membuat 50,000 unit.
2. How many hours of each class of direct labor must be used to manufacture 47,000 good
finished units?
New Team = 8 Assembler A, 1 Assembler B, 1 Machinist
New team akan bekerja 80% efektif dari pada old team (80 unit new team: 100 unit oled
team)
Assembler A = 8 X (50,000 : 80%) = 5,000 jam
Assembler B = 1 X (50,000 : 80%) = 625 jam
Machinist = 1 X (50,000 : 80%) = 625 jam
Total Jam = 5,000 + 625 + 625 = 6,250 jam

3. Determine the amount that should be included in Tracer's January operating budget for the
planned direct labor variance caused by the reorganization of the direct labor teams and the
lower quality direct materials. (CMA adapted)

Biaya atas new team untuk produksi 80 unit:

Assembler A = 8 X $ 10 $ 80
Assembler B = 1 X $ 11 11
Machinist = 1 X $ 15 15
Direct Labor cost $106
Direct Labor cost = 106/80 = $ 1.325
New Direct labor = January Unit x New Direct Labor Cost
= 50,000 x 1.325
= $ 66,250
Old Direct labor = January Unit x Standar cost
 = 50,000 x (113/100)
= $ 56,500
Perubahan Direct labor = $ 66,250 - $ 56,500 = $ 9,750

Perubahan DL atas perubahan DM:

Perubahan direct labor = (New DM – Standard DM) x standard cost
= (50,000 – 47,000) x (113/100)
= $ 3,390

Total direct labor variance = $ 9,750 + $ 3,390

= $ 13,140
Problem 18.32

Contribution Margin Variance, Contribution Margin Volume

Variance, Market Share Variance, Market Size Variance

Sulert, Inc., produces and sells gel-filled ice packs. Sulert's performance
report for April follows:

Required:
1. Calculate the contribution margin variance and the contribution margin volume variance.
Contribution Margin variance = $ 797,500 - $ 878,700 = $ 81,200 U
Contribution Margin volume variance = $ 878,700 : 300,000 = $ 2.929 per unit
= (290,000 – 300,000) x $ 2.929
= $ 29,290 U

2. Calculate the market share variance and the market size variance. (CMA adapted)
Actual market share percentage = 290,000/1,250,000 = 0.232
Budget market share percentage = 300,000/1,200,000 = 0.25
Market share variance = [(0.232-0.25) x (1,250,000 x $ 2.929)]
= $ 65,903 U
Market size variance = [(1,250,000 – 1,200,000) x $2,929 x 0.25]
= $ 36,613 F