Principles of Cost Accounting: Week 8 (P8-3, P8-7, P8-13)

Principles of Cost Accounting
Week 8 Problems (P8-3, P8-7, P8-13)

P8-3 Materials and labor variances analyses
Accelerator, Inc. manufactures a fuel additive, Stomp, that has a stable selling price of $44 per drum. The company has been producing and selling 80,000 drums per month.
In connection with your examination of Accelerator’s financial statements for the year ended September 30, management has asked you to review some computations made by Accelerator’s cost accountant. Your working papers disclose the following about the company’s operations:
Standard costs per drum of product manufactured:
Materials:
8 gallons of [email protected]$2 . . . . . . . . . . . . $16
1 empty drum @ $1/drum . . . . . . . . . . . . . . . 1 $17
Direct labor: 1 hour @ $8/hour . . . . . .. . . . . . . $ 8
Factory Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6
Costs and expenses during September:
Stomp: 600,000 gallons purchased at a cost of $1,140,000; 645,000 gallons used.
Empty drums: 94,000 purchased at a cost of $94,000; 80,000 drums used.
Direct labor: 81,000 hours worked at a cost of $654,480.
Factory overhead: $768,000.

Required:
Calculate the following variances for September
1. Materials quantity variance.
2. Materials purchase price variance.
3. Labor efficiency variance.
4. Labor rate variance.

P8-7 Materials and labor variance analyses
The standard cost summary for the most popular product of Excelsior Products Company is shown as follows, together with production and cost data for the period.
Standard Cost Summary
Materials:
2 gallons of liquid [email protected]$2.00/gallon . . . . . . . $4.00
2 gallons of [email protected]$3.00/gallon . . . . . . . . . $6.00 $10.00
Labor:
1 [email protected]$12.00/hour. . . . . . . . . . . . . . . . . . . . . 12.00
Factory overhead:
$1.00 per direct labor hour . . . . . . . . . . . . . . . . 1.00
Total standard unit cost . . . . . . . . . . . . . . . . . . . $23.00
Production and Cost Summary
Units completed during the month . . . . . . . . . . 9,000
Ending units in process (one-fourth completed) . . 2,000
Gallons of liquid lead used . . . . . . . . . . . . . . . . . . . 21,000
Gallons of varnish used . . . . . . . . . . . . . . . . . .. 20,000
Direct labor hours worked . . . . . . . . . . . . . . . . 10,000
Cost of liquid lead used . . . . . . . . . . . . . . . . . .. 41,160
Cost of varnish used . . . . . . . . . . . . . . . . . . . . . 60,000
Cost of direct labor . . . . . . . . . . . . . . . . . . . . . 117,000
One gallon each of liquid lead and varnish are added at the start of processing. The balance of the materials is added when the process is two-thirds complete. Labor and overhead are added evenly throughout the process.

Required:
1. Calculate equivalent production. (Be sure to refer to the standard cost summary to help determine the percentage of materials in ending work in process.)
2. Calculate materials and labor variances and indicate whether they are favorable or unfavorable.
3. Determine the cost of materials and labor in the work in process account at the end of the month.
4. Prove that all materials and labor costs have been accounted for.

P8-13 Variance analysis
Folsom Shirts, Inc., manufactures men’s sport shirts for large stores. Folsom produces a single quality shirt in lots of a dozen according to each customer’s order and attaches the store’s label.
The standard costs for a dozen shirts include the following:
Direct materials . . . . . . . . [email protected]$0.55/yard $13.20
Direct labor . . . . . . . . . . . [email protected]$7.35/hour 22.05
Factory overhead . . . . . . [email protected]$2.00/hour 6.00
Standard cost per dozen . $41.25
During October, Folsum worked on three orders for shirts. Job cost records for the month disclose the following:

Lot Units in Lot Materials Used Hours Worked
30 1,000 dozen 24,100 yards 2,980
31 1,700 dozen 40,440 yards 5,130
32 1,200 dozen 28,825 yards 2,890
The following information is also available:
a. Folsom purchased 95,000 yards of materials during October at a cost of $53,200. The materials price variance is recorded when goods are purchased, and all inventories are carried at standard cost.
b. Direct labor incurred amounted to $81,400 during October. According to payroll records, production employees were paid $7.40 per hour.
c. Overhead is applied on the basis of direct labor hours. Factory overhead totaling $22,800 was incurred during October.
d. A total of $288,000 was budgeted for overhead for the year, based on estimated production at the plant’s normal capacity of 48,000 dozen shirts per year. Overhead is 40% fixed and 60% variable at this level of production.
e. There was no work in process at October 1. During October, Lots 30 and 31 were completed, and all materials were issued for Lot 32, which was 80% completed as to labor and overhead.

Required:
1. Prepare a schedule computing the October standard cost of Lots 30, 31, and 32.
2. Prepare a schedule computing the materials price variance for October and indicate whether it is favorable or unfavorable.
3. For each lot produced during October, prepare schedules computing the following (indicate whether favorable or unfavorable):
a. Materials quantity variance in yards.
b. Labor efficiency variance in hours. (Hint: Don’t forget the percentage of completion.)
c. Labor rate variance in dollars.
4. Prepare a schedule computing the total controllable and volume overhead variances for October and indicate whether they are favorable or unfavorable.
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