CHAPTER 19 DISCUSSION QUESTIONS Q19-1 When standard costs are not incorporated, they may be used for the purposes of pricing, budgeting, and controlling cost; but if they are not used for inventory costing, the advantages from the saving of clerical effort in accounting cannot be obtained Q19-2 With actual cost methods, it is first necessary to select a cost flow method—lifo, fifo, average, etc It is then necessary to keep detailed records of quantities and prices and to make fairly complex calculations of inventory costs With a standard costing system, only quantities, not prices, must be taken into account, facilitating both record keeping and calculations Standard costs also provide cost control Q19-3 The number of variance accounts is determined by (a) the number and type of variances that are to appear in statements for management use, and (b) the need for easy disposal of variances at the end of the fiscal period, particularly when the variances are not treated uniformly in financial statements and for analyses Q19-4 (a) The standard cost of products completed and products sold can be determined immediately without waiting for the actual cost to be calculated With standard costs, monthly statements can be prepared more quickly (b) A firm producing a great many different products finds it practically impossible to determine the actual cost of each product The use of standard costs will facilitate the preparation of income statements by product lines (c) Keeping finished goods stock records in quantities only will result in clerical saving, since this eliminates the necessity for recording the actual unit cost of each receipt and issue or shipment Q19-5 The standard costing of inventories depends on (a) the types of standards employed, (b) the degree of success that the company has in keeping overall actual costs in line with standard costs, and (c) the concept held with regard to the most suitable kind of cost Q19-6 (a) Deferral of variances is supported on the grounds that, if the standards in use are based on normal price, efficiency, and output levels, positive and negative variances can be expected to offset one another in the long run Because variance account balances at any given point in time are due to recurring seasonal and business cycle fluctuations, and because periodic reporting requirements result in arbitrary cutoff dates, variance account balances at a particular cutoff date are not assignable to operating results of the period then ended They will cancel out over time and therefore should be carried to the balance sheet (b) Variances appearing as charges or credits on the income statement are regarded as appropriate charges or credits in the period in which they arise They are considered the result of favorable or unfavorable departures from normal (standard) conditions and are disclosed separately from cost of goods sold at standard This provides management with unobscured information for immediate corrective action Inventory costs and cost of goods sold should not be distorted by variances that represent abnormal efficiencies or inefficiencies The standard cost represents that amount which is reasonably necessary to produce finished products and should therefore be considered the best measure of the cost of goods manufactured and inventory cost, as long as the underlying operating conditions remain unchanged (c) The argument for allocating variances between inventories and cost of goods sold is that standard costs are a useful tool for purposes of managerial control, but should not be substitutes for actual historical costs in the financial statements Only actual historical costs should be used for financial reporting, even 19-1 19-2 Chapter 19 though they are greater or less than standard costs, and without regard to the reasons for their differences from standard costs Standard cost variances are not gains or losses but costs (or reductions therein) of goods manufactured and should be allocated between inventories and cost of goods sold To treat them as gains or losses in the period in which they arise distorts both the inventory and gross profit figures This distortion will be even greater if the standards are lacking in accuracy or reliability Further, to substitute standard costs for actual historical costs in the financial statements represents an unwarranted sacrifice of objectivity Chapter 19 19-3 EXERCISES E19-1 Price variance recorded at the time materials are received and placed in the storeroom: Materials (20,000 × $.42) Materials Purchase Price Variance (20,000 × $.02) Accounts Payable (20,000 × $.44) 8,400 400 Work in Process (8,200 × × $.42) Materials Quantity Variance (100 × $.42) Materials (16,500 × $.42) 6,888 42 8,800 6,930 Materials recorded at actual cost when received, and price variance determined at the time materials are issued to production: Materials (20,000 × $.44) Accounts Payable 8,800 Work in Process (8,200 × × $.42) Materials Price Usage Variance (16,500 × $.02) Materials Quantity Variance (100 × $.42) Materials (16,500 × $.44) 6,888 330 42 8,800 7,260 Price variance determined when the materials are received, but not charged to production until the materials are actually placed in process: Materials (20,000 × $.42) Materials Purchase Price Variance (20,000 × $.02) Accounts Payable (20,000 × $.44) 8,400 400 Work in Process (8,200 × × $.42) Materials Quantity Variance (100 × $.42) Materials (16,500 × $.42) 6,888 42 Materials Price Usage Variance (16,500 × $.02) Materials Purchase Price Variance 330 Materials (12,000 AQ purchased × $8 SP) Materials Purchase Price Variance Accounts Payable 96,000 960 Work in Process (12,800 SO × $8 SP) Materials Quantity Variance Materials (13,000 AQ issued × $8 SP) 102,400 1,600 8,800 6,930 330 E19-2 (1) 96,960 104,000 19-4 Chapter 19 E19-2 (Concluded) (2) Average costing Beginning inventory Purchases Available for use (3) (4) Total Cost $ 15,880 96,960 112,840 Quantity 2,000 12,000 14,000 Unit Cost $7.94 8.08 8.06 average Materials Accounts Payable 96,960 Work in Process (12,800 SQ × $8 SP) Materials Quantity Variance ((13,000 – 12,800) × $8 SP) Materials Price Usage Variance (13,000 AQ × ($8.06 AP – $8 SP)) Materials (13,000 AO × $8.06 AP) 102,400 1,600 Fifo inventory Work in Process (same as above) Materials Quantity Variance (same as above) Materials Price Usage Variance Materials (($7.94 × 2,000 units) + ($8.08 × 11,000 units)) Lifo inventory Work in Process (same as above) Materials Quantity Variance (same as above) Materials Price Usage Variance Materials (($8.08 × 12,000 units) + ($7.94 × 1,000 units)) 96,960 780 104,780 102,400 1,600 760 104,760 102,400 1,600 900 104,900 E19-3 Payroll Accrued Payroll 18,144 Work in Process (2,400 × 3/4 × $9.50) Labor Efficiency Variance (120 × $9.50) Labor Rate Variance (1,920 × $.05) Payroll (1,920 × $9.45) 17,100 1,140 18,144 96 18,144 Chapter 19 19-5 E19-4 Work in Process (10,000 units × SQ per unit × $2 SP) Materials Price Variance (($2.02 AP – $2 SP) × 21,000 AQ) Materials Quantity Variance ($2 SP × (20,000 SQ – 21,000 AQ)) Materials (21,000 AQ × $2.02 AP) Work in Process (10,000 units × 1/4 SH per unit × $12 SR) Labor Rate Variance (($12.20 AR – $12 SR) × 2,425 AH) Labor Efficiency Variance ($12 SR × (2,425 AH – 2,500 SH)) Payroll (2,425 AH × $12.20 AR) 40,000 420 2,000 42,420 30,000 485 900 29,585 E19-5 (1) (2) (3) Work in Process ($7 FO rate × 12,000 SH) Applied Factory Overhead 84,000 Applied Factory Overhead Factory Overhead Control 84,000 Volume Variance ($4.50 fix rate × (15,000 BH – 12,000 SH)) Controllable Variance Factory Overhead Control ($88,800 actual – $84,000 applied) 84,000 84,000 13,500 8,700 4,800 E19-6 (1) (2) (3) (4) Factory Overhead Control Various Credits 55,900 Work in Process (11,000 SH × $5 FO rate) Applied Factory Overhead 55,000 Applied Factory Overhead Factory Overhead Control 55,000 Controllable Variance Volume Variance ($2 fix rate × (10,000 BH – 11,000 SH)) Factory Overhead Control ($55,900 actual – $55,000 applied) 2,900 55,900 55,000 55,000 2,000 900 19-6 Chapter 19 E19-7 (1) (2) (3) Work in Process (4,800 SH × $16 FO rate) Applied Factory Overhead 76,800 Applied Factory Overhead Factory Overhead Control 76,800 Variable Efficiency Variance ($4 var rate × (5,200 AH – 4,800 SH)) Volume Variance ($12 fix rate × (5,000 BH – 4800 SH)) Spending Variance Factory Overhead Control ($77,800 actual – $76,800 applied) 76,800 76,800 1,600 2,400 3,000 1,000 E19-8 (1) (2) (3) Work in Process (7,000 SH × $11 FO rate) Applied Factory Overhead 77,000 Applied Factory Overhead Factory Overhead Control 77,000 Variable Efficiency Variance ($8 var rate × (7,600 AH – 7,000 SH)) Volume Variance ($3 fix rate × (8,000 OH – 7,000 SH)) Spending Variance Factory Overhead Control ($87,900 actual – $77,000 applied) 77,000 77,000 4,800 3,000 3,100 10,900 Chapter 19 19-7 E19-9 Percentage of current-year labor cost element in finished goods and cost of goods sold: Amount % Finished goods, 19,000 units × $4 labor $ 76,000 20 Cost of goods sold (from current production), (91,000 units – 15,000 units) × $4 labor 304,000 80 $380,000 100 Allocation of current-year labor variances: Finished goods ($52,000 × 20%) Cost of goods sold ($52,000 × 80%) $10,400 41,600 $52,000 End-of-year balances: Finished Cost of Goods Goods Sold $171,000 $819,000 10,400 41,600 Balance at standard Current year’s labor variances allocation Last year’s variances, all applicable to cost of goods sold on a fifo flow assumption $181,400 5,800 866,400 E19-10 Percentage of units in inventories and cost of goods sold: Account Work in Process Finished Goods Cost of Goods Sold Total Materials Units % 1,500 25% 1,200 20% 3,300 55% 6,000 100% Direct Labor and Factory Overhead Units % 500 10% 1,200 24% 3,300 66% 5,000 100% Allocation of variances: Variance Materials purchase price Materials quantity Labor rate Labor efficiency Controllable Volume Total Total Amount $ (150.00) 500.00 600.00 1,200.00 1,500.00 (1,800.00) $ 1,850.00 Work in Process $ (37.50) 125.00 60.00 120.00 150.00 (180.00) $ 237.50 Finished Goods $ (30.00) 100.00 144.00 288.00 360.00 (432.00) $ 430.00 Cost of Goods Sold $ (82.50) 275.00 396.00 792.00 990.00 (1,188.00) $ 1,182.50 19-8 Chapter 19 E19-11 APPENDIX Work in Process ($4 FO rate × 3,450 units × 1.5 SH per unit) Applied Factory Overhead 20,700 Applied Factory Overhead Efficiency Variance ($4 FO rate × (5,320 AH – 5,175 SH)) Idle Capacity Variance ($3 fix rate × (6,000 OH – 5,320 AH)) Spending Variance Factory Overhead control 20,700 580 2,040 20,700 2,920 20,400 E19-12 APPENDIX Work in Process ($20 FO rate × 9,400 SH) Applied Factory Overhead 188,000 Applied Factory Overhead Variable Efficiency Variance ($4.50 var × (10,600 AH – 9,400 SH)) Fixed Efficiency Variance ($15.50 fix × (10,600 AH – 9,400 SH)) Spending Variance Idle Capacity Variance ($15.50 fix × (10,000 BH – 10,600 AH)) Factory Overhead Control 188,000 188,000 5,400 18,600 7,200 9,300 195,500 Chapter 19 19-9 PROBLEMS P19-1 Materials (33,000 AQ purchased × $2 SP) Materials Purchase Price Variance Accounts Payable (33,000 AQ purchased × $1.94 AP) 66,000 Work in Process (6,000 equivalent units × SQ × $2 SP) Materials Quantity Variance Materials (40,000 AQ issued × $2 SP) 72,000 8,000 Work in Process (5,800 equivalent units × 1/4 SH × $8 SR) Labor Rate Variance (($8.20 AR – $8 SR) × 1,500 AH) Labor Efficiency Variance ($8 SR × (1,500 AH – 1,450 SR)) Payroll ($8.20 AR × 1,500 AH) 11,600 300 400 Factory Overhead Control Various Credits 67,250 Work in Process (5,500 equivalent units × 3/4 SH × $16 FO rate) Applied Factory Overhead 1,980 64,020 80,000 12,300 67,250 66,000 66,000 Applied Factory Overhead Controllable Variance Volume Variance ($12 fixed rate × (4,000 BH – 4,125 SH)) Factory Overhead Control 66,000 2,750 Finished Goods (5,200 units × $26 standard cost) Work in Process 135,200 Accounts Receivable (5,500 units × $40 sales price) Sales 220,000 Cost of Goods Sold (5,500 units × $26 standard cost) Finished Goods 143,000 1,500 67,250 135,200 220,000 143,000 19-10 Chapter 19 P19-2 Materials 2,400 300 Labor 2,400 300 Overhead 2,400 300 2,100 2,100 2,100 200 2,300 100 80 2,280 150 50 2,300 units 3/4 DLH MH 11,500 1,710 4,600 Materials (11,000 AQ purchased × $6 SP) Materials Purchase Price Variance Accounts Payable 66,000 900 Work in Process ($6 SP × 11,500 SQ allowed) Materials Quantity Variance Materials ($6 SP × 12,000 AQ issued) 69,000 3,000 Work in Process ($12 SR × 1,710 SH allowed) Labor Rate Variance ($12.10 AR – $12 SR) × 1,700 AH) Labor Efficiency Variance ($12 SR × (1,700 AH – 1,710 SH)) Payroll 20,520 170 Factory Overhead Control Various Credits 67,700 Work in Process ($14 FO rate × 4,600 SH allowed) Applied Factory Overhead 64,400 Applied Factory Overhead Variable Efficiency Variance ($2.80 var rate* × (4,900 AH – 4,600 SH)) Volume Variance ($11.20 fix rate** × (5,000 SH – 4,600 SH)) Spending Variance Factory Overhead Control 64,400 Units completed and transferred out this period Less all units in beginning inventory Equivalent units started and completed this period Add equivalent units required to complete beginning inventory Add equivalent units in ending inventory Equivalent units of production this period Multiply by standard quantity of input per unit of product Standard quantity of input allowed for work produced during the period *$14 FO rate × 20% variable = $2.80 variable rate **$14 FO rate – $2.80 variable rate = $11.20 fixed rate 66,900 72,000 120 20,570 67,700 64,400 840 4,480 2,020 67,700 19-12 Chapter 19 P19-3 (Concluded) Finished Goods Inventory (5,000 units × $14 standard cost*) Work in Process *Materials (6 units @ $.50 each) Labor (1/2 hour @ $10 per hour) Overhead: Variable (1/2 hour @ $3 per hour) Fixed (1/2 hour @ $9 per hour) Total standard cost per unit of product 70,000 70,000 $ 3.00 5.00 1.50 4.50 $14.00 Cost of Goods Sold (5,100 units × $14 standard cost) Finished Goods Inventory 71,400 71,400 Accounts Receivable (5,100 units × $22 sales price) 112,200 Sales 112,200 CGA-Canada (adapted) Reprint with permission P19-4 LEESVILLE CORPORATION Income Statement For Year Ended December 31, 20A Sales ((20,000 units + 110,000 units – 12,000 units) × $25) Cost of goods sold at standard (118,000 units × 17.60) Gross profit at standard Add net manufacturing variance Gross profit, adjusted to actual Less marketing and administrative expenses Operating income 1Manufacturing variances: Materials: Purchase price Quantity Labor: Rate Efficiency Factory overhead: Controllable Volume Unfavorable Favorable $3,750 $15,000 25,760 44,000 8,000 $48,760 Net favorable variance $2,950,000 2,076,800 $ 873,200 901 $ 873,290 680,500 $ 192,790 1,100 $48,850 48,760 $ 90 fav Chapter 19 19-13 P19-4 (Continued) Computation of manufacturing variances: Materials: Actual quantity × average cost (250,000 lbs × 1.485 per lb.) Actual quantity × standard cost (250,000 lbs × $1.50 per lb.) Materials purchase price variance Transferred into production (240,000 lbs × $1.50) Standard quantity for 115,000* equivalent production units (230,000 lbs × $1.50 per lb., or 115,000 units × $3 per unit) Materials quantity variance $371,250 375,000 $ (3,750) fav $360,000 345,000 $ 15,000 unfav *Computation of equivalent production for materials: Transferred out of work in process Beginning inventory (all completed) Started and completed this period Add ending inventory Total Pound Basis 220,000 20,000 200,000 30,000 230,000 Labor: Actual labor cost Actual hours × standard labor rate (161,000 hours × $8) Labor rate variance $1,313,760 1,288,000 $25,760 unfav Actual hours × standard labor rate Standard hours × standard labor rate (166,500 hrs.** × $8 per hour, or 111,000 units ** × $12 per unit) Labor efficiency variance Unit Basis 110,000 10,000 100,000 15,000 115,000 $1,288,000 1,332,000 $ (44,000) fav 19-14 Chapter 19 P19-4 (Concluded) **Computation of equivalent production for labor and factory overhead: Transferred out of work in process Beginning inventory—work in process Started and completed this period Add 3/5 to complete beginning inventory Add 1/3 of ending inventory Total Hour Basis 165,000 15,000 150,000 9,000 7,500 166,500 Unit Basis 110,000 10,000 100,000 6,000 5,000 111,000 Factory overhead (two-variance method): Actual factory overhead Budget allowance: Variable overhead (111,000 units × $1.50) $166,500 Fixed overhead 121,000 Controllable variance Budget allowance Applied factory overhead (111,000 units × $2.60) Volume variance $295,500 287,500 $8,000 unfav $287,500 288,600 $ (1,100) fav P19-5 KALMAN COMPANY Interim Income Statement For the Second Quarter, 20— Sales (600,000 × $30) Cost of goods sold at standard (500,000 × $18) Gross profit at standard Adjustments for standard cost variances: $237,600 Materials price variance1 36,000 Labor efficiency variance2 135,000 Overhead spending variance 8,000 Variable overhead efficiency variance4 Overhead volume variance Adjusted gross profit Less commercial expenses: Marketing expenses ($18,000,000 × 10%) $1,800,000 Administrative expenses ($6,000,000 × 25%) 1,500,000 Income before income tax Less income tax expense ($3,483,400 × ($3,750,000 / $7,500,000)) Net income $18,000,000 10,800,000 $ 7,200,000 416,600 $ 6,783,400 3,300,000 $ 3,483,400 1,741,700 $1,741.700 Chapter 19 19-15 P19-5 (Continued) 1The materials price variance should be prorated between work in process, finished goods, and cost of goods sold as follows: Ending balance of work in process = $72, 000 = $18 per unit 4, 000 units Ending balance of finished goods = $900, 000 = $18 per unit 50, 000 units Total units in ending inventories Total units produced during second quarter Total units in ending inventories Units produced and sold during second quarter _ 54,000 units 450,000 54,000 396,000 396, 000 Materials price variance charged = × 270, 000 = $237, 600 to cost of goods sold 450,0 000 Since the labor efficiency variance is not regarded as significant, all of it is charged against second quarter income 3A portion of the overhead spending variance is attributable to the overtime premium paid Since the overtime premium was incurred in order to meet sales forecasts for the entire year, the portion of the spending variance resulting from the overtime premium ($9.00 labor per unit at regular rate × 50% = $4.50/unit) should be prorated over the entire year in proportion to the sales of each quarter as follows: Production in excess of capacity (Quarters and only): Quarter = 465,000 – 430,000 = 35,000 units Quarter = 450,000 – 430,000 = 20,000 units Overtime premium resulting from excess production: Quarter = 35,000 units × $4.50/unit = $157,500 Quarter = 20,000 units × $4.50/unit = 90,000 Total overtime premium for first six months $247,500 Proration of overtime premium portion of spending variance based on sales: Quarter = $600,000 × $247,500 total overtime premium = $99,000 $1,500,000 19-16 Chapter 19 P19-5 (Concluded) The overhead spending variance charged against second quarter income is calculated as follows: Total overhead spending variance for second quarter Amount resulting from second quarter overtime premium Amount related to unexpected inefficiencies Amount of overtime premium chargeable to second quarter on the basis of sales allocation determined above Total spending variance charged against second quarter income $126,000 90,000 $36,000 99,000 $135,000 Since factory overhead is charged to production on the basis of direct labor hours, an unfavorable variable overhead efficiency variance occurs because of the inefficient use of direct labor The amount of the unfavorable overhead variable efficiency variance is determined as follows: $36, 000 Labor efficiency variance × $2 = 8, 000 × Variable overhead per unit = $9 Labor cost per unit The company policy is to report a volume variance on interim statements only if actual production differs from the planned production schedule Since actual production is equal to budgeted production through the end of the second quarter, there is no volume variance to be charged against second quarter income P19-6 (1) Units completed and transferred out Less beginning inventory (all units) Started and completed this period Add work this period in inventories: Beginning inventory Ending inventory Equivalent units of Westco Standard quantity per unit of Westco Standard quantity allowed Material A 15,000 6,000 9,000 Material B 15,000 6,000 9,000 Labor 15,000 6,000 9,000 Factory Overhead 15,000 6,000 9,000 5,000 14,000 × 14,000 2,000 2,500 13,500 × 81,000 3,000 1,250 13,250 × 1/2 6,625 2,000 2,500 13,500 × 1/3 4,500 Materials ((15,000 × $14) + (80,000 × $2)) Materials Purchase Price Variance Accounts Payable ((15,000 × $13) + (80,000 × $3)) 370,000 65,000 Work in Process ((14,000 × $14) + (81,000 × $2)) Materials Quantity Variance Materials ((14,200 × $14) + (82,300 × $2)) 358,000 5,400 435,000 363,400 Chapter 19 19-17 P19-6 (Concluded) Work in Process (6,625 × $10) Labor Rate Variance (6,500 × ($10 – $11)) Labor Efficiency Variance ((6,625 – 6,500) × $10) Payroll (6,500 × $11) 66,250 6,500 Work in Process (4,500 × $27) Applied Factory Overhead 121,500 Applied Factory Overhead Volume Variance ((5,000 – 4,500) × $24) Spending Variance Variable Efficiency Variance ((4,500 – 4,400) × $3) Factory Overhead Control 121,500 12,000 1,250 71,500 121,500 11,200 300 122,000 (2) Labor Efficiency Variance Spending Variance Variable Efficiency Variance Income Summary Materials Purchase Price Variance Materials Quantity Variance Labor Rate Variance Volume Variance (3) 1,250 11,200 300 76,150 65,000 5,400 6,500 12,000 PACIFIC MANUFACTURING COMPANY Income Statement For Year Ended December 31, 20A Sales ((4,000 + 15,000 – 3,600) × $60) Cost of goods sold (15,400 × $40) Gross profit at standard Adjustments for standard cost variances: Materials purchase price variance Materials quantity variance Labor rate variance Labor efficiency variance Spending variance Variable efficiency variance Volume variance Adjusted gross profit Less commercial expenses Income before income tax Income tax expense (30% × $111,850) Net income $924,000 616,000 $308,000 $65,000 5,400 6,500 (1,250) (11,200) (300) 12,000 76,150 $231,850 120,000 $111,850 33,555 $ 78,295 19-18 Chapter 19 P19-7 (1) Materials (40 000 liters AQ purchased × $4 SP) Materials Purchase Price Variance Accounts Payable Work in Process (10,000 units × liters SQ per unit × $4 SP) Materials Quantity Variance Materials (31 000 liters AQ issued × $4 SP) 160,000 800 159,200 120,000 4,000 124,000 Work in Process (10,000 units × 1/2 SH × $7 SR) Labor Rate Variance (($7.42 AR – $7 SR) × 4,800 AH) Labor Efficiency Variance ($7 SR × (4,800 AH – 5,000 SH)) Payroll ($7.42 AR × 4,800 AH) 35,000 2,016 Work in Process (10,000 units × 1/2 SH × $15 FO rate) Applied Factory Overhead 75,000 Factory Overhead Control Various Credits 80,300 Finished Goods (10,000 units × $23 standard cost) Work in Process 230,000 Cost of Goods Sold (8,000 units × $23 standard cost) Finished Goods 184,000 Accounts Receivable (8,000 units × $40 sales price) Sales 320,000 Marketing and Administrative Expenses Various Credits 50,000 1,400 35,616 75,000 80,300 230,000 184,000 320,000 50,000 Chapter 19 19-19 P19-7 (Continued) (2) Actual factory overhead Budget allowance based on 4,800 actual hours: Variable overhead ($6 variable rate × 4,800 AH) $28,800 Fixed overhead 49,500 Spending variance Budget allowance based on 4,800 actual hours (from above) Budget allowance based on 5,000 standard hours: Variable overhead ($6 variable rate × 5,000 SH) $30,000 Fixed overhead 49,500 Variable efficiency variance Budget allowance based on 5,000 standard hours (from above) Applied factory overhead ($15 FO rate × 5,000 SH) Volume variance (3) $80,300 78,300 unfav $ 2,000 unfav $78,300 79,500 $ (1,200) fav $79,500 75,000 $ 4,500 unfav GRINDLE CORPORATION Income Statement For November Sales Less cost of goods sold: Standard cost $184,000 Net unfavorable variances (Schedule 1) 9,116 Gross profit Marketing and administrative expenses Income before taxes $320,000 193,116 $124,484 50,000 $74,484 19-20 Chapter 19 P19-7 (Concluded) Schedule GRINDLE CORPORATION Schedule of Variances For November Unfav Materials purchase price variance Materials quantity variance Labor rate variance Labor efficiency variance Factory overhead spending variance Factory overhead variable efficiency variance Factory overhead volume variance Fav $ 800 $ 4,000 2,016 1,400 2,000 1,200 4,500 $12,516 (3,400) $ 9,116 Net unfavorable variance $3,400 CGA-Canada (adapted) Reprint with permission P19-8 Materials price usage variance Materials quantity variance Direct labor rate variance Factory overhead spending variance Total variances Discounts lost on purchases Total Total $1,500 660 250 (300) $2,110 120 $2,230 Allocated to Cost of Goods Manufactured Allocated to Cost of Work in Finished Goods Process Total Goods Sold $500 $1,000 $375 $625 220 440 165 275 50 200 75 125 (60) (240) (90) (150) $710 $1,400 $525 $875 40 80 30 50 $750 $1,480 $555 $925 Materials Production Units % Work in Process: Materials (1,200 units × 100%) Direct labor (1,200 units × 50%) Factory overhead (1,200 units × 50%) Finished goods (900 units × 100%) Cost of goods sold (1,500 units × 100%) Total 1,200 900 1,500 3,600 Direct Labor Production Units % Factory Overhead Production Units % 331/3 25 412/3 100 600 20 900 1,500 3,000 30 50 100 600 900 1,500 3,000 20 30 50 100 Chapter 19 19-21 P19-8 (Concluded) (2) Materials Work in process at standard cost: Materials (1,200 units × $7 × 100%) Direct labor (1,200 units × $8 × 50%) Factory overhead (1,200 units × $2 × 50%) Finished goods at standard cost: Materials (900 units × $7) Direct labor (900 units × $8) Factory overhead (900 units × $2) Cost of goods sold at standard cost: Materials (1,500 units × $7) Direct labor (1,500 units × $8) Factory overhead (1,500 units × $2) Total mfg cost at standard cost Less work in process, Dec 31, 20— Cost of goods manufactured at standard cost Add: Variance allocation Allocation of discounts lost on purchases Cost of goods manufactured at actual cost Direct Labor Factory Overhead Total $1,200 $14,400 1,800 15,300 25,500 $55,200 14,400 $40,800 1,400 $ 8,400 $ 4,800 6,300 7,200 10,500 12,000 $25,200 8,400 $24,000 4,800 3,000 $6,000 1,200 $16,800 1,440 $19,200 200 $4,800 (240) 80 $18,320 (3) Materials at standard cost Materials—price variance allocation —quantity variance allocation —allocation of discounts lost on purchases Total materials Direct labor at standard cost Direct labor—rate variance allocation Total direct labor Factory overhead at standard cost Factory overhead—spending variance allocation Total factory overhead Total inventories at actual cost 80 $19,400 $4,560 $42,280 Work in Process $ 8,400 500 220 Finished Goods $ 6,300 375 165 Total $14,700 875 385 40 9,160 4,800 50 4,850 1,200 30 6,870 7,200 75 7,275 1,800 70 $16,030 $12,000 125 $12,125 $ 3,000 $ $ $ $ (60) $ 1,140 $15,150 $ $ $ $ (90) $ 1,710 $15,855 (150) $ 2,850 $31,005 19-22 Chapter 19 P19-9 APPENDIX Units completed and transferred out this period Less all units in beginning inventory Equivalent units started and completed this period Add equivalent units required to complete beginning inventory Add equivalent units in ending inventory Equivalent units of production this period Multiply by standard quantity of input per unit of product Standard quantity of input allowed for work produced during the period Cotton Cloth 3,000 1,000 2,000 Dyes 3,000 1,000 2,000 Conversion cost 3,000 1,000 2,000 750 2,750 750 2,750 750 250 3,000 yards pint 5,500 2,750 Materials—Cotton Cloth (5,000 yards AQ purchased × $1 SP) Materials Purchase Price Variance—Cotton Cloth Accounts Payable (5,000 yards AQ purchased × $1.10 AP) 5,000 500 Materials—Dyes (2,500 pints AQ purchased × $.50 SP) Materials Purchase Price Variance—Dyes Accounts Payable (2,500 pints AQ purchased × $.49 AP) 1,250 Work in Process (5,500 yards SQ allowed × $1 SP) Materials Quantity Variance—Cotton Cloth Materials—Cotton Cloth (5,600 yards AQ issued × $1 SP) 5,500 100 Work in Process (2,750 pints SQ allowed × $.50 SP) Materials Quantity Variance—Dyes Material—Dyes (2,700 pints AQ issued × $.50 SP) 1,375 Payroll (1,550 AH × $5.90 AR) Accrued Payroll (and employee withholding accounts) 9,145 Work in Process (1,500 SH allowed × $6 SR) Labor Efficiency Variance ($6 SR × (1,550 AH – 1,500 SH)) Labor Rate Variance (($5.90 AR – $6 SR) × 1,550 AH) Payroll 9,000 300 Factory Overhead Control Various Credits 15,900 Work in Process (1,500 SH allowed × $10 FO rate) Applied Factory Overhead 15,000 /2 hour 1,500 5,500 25 1,225 5,600 25 1,350 9,145 155 9,145 15,900 15,000 Chapter 19 19-23 P19-9 APPENDIX (Concluded) Applied Factory Overhead Overhead Spending Variance Overhead Efficiency Variance ($10 rate × (1,550 AH – 1,500 SH)) Overhead idle Capacity Variance ($7 fixed rate × (1,600 BH – 1,550 AH)) Factory Overhead Control 15,000 50 Finished Goods (3,000 units × $10.50 standard cost) Work in Process 31,500 Accounts Receivable (3,100 units sold × $14 sales price) Sales 43,400 Cost of Goods Sold (3,100 units × $10.50 standard cost) Finished Goods 32,550 Cost of Goods Sold Materials Purchase Price Variance—Dyes Materials Quantity Variance—Dyes Labor Rate Variance Materials Purchase Price Variance—Cotton Cloth Materials Quantity Variance—Cotton Cloth Labor Efficiency Variance Overhead Spending Variance Overhead Efficiency Variance Overhead Idle Capacity Variance 1,595 25 25 155 500 350 15,900 31,500 43,400 32,550 500 100 300 50 500 350 P19-10 APPENDIX Materials (10 000 kg AQ purchased × $2 SP) Materials Purchase Price Variance Accounts Payable (10 000 kg AQ purchased × $1.95 AP) 20,000 Work in Process (900 units × kg SQ per unit × $2 SP) Materials Quantity Variance Materials (8 600 kg AQ issued × $2 SP) 16,200 1,000 Work in Process (900 units × SH per unit × $10.50 SR) Labor Rate Variance (($11.55 AR – $10.50 SR) × 1,740 AH) Labor Efficiency Variance ($10.50 SR × (1,740 AH – 1,800 SH)) Payroll ($11.55 AR × 1,740 AH) 18,900 1,827 500 19,500 17,200 630 20,097 19-24 Chapter 19 P19-10 APPENDIX (Concluded) Factory Overhead Control Various Credits 24,000 Work in Process (900 units × SH × $13 FO rate) Applied Factory Overhead 23,400 Applied Factory Overhead Idle Capacity Variance ($10 fixed rate × (2,000 BH – 1,740 AH)) Spending Variance Variable Efficiency Variance ($3 var rate × (1,740 AH – 1,800 SH)) Fixed Efficiency Variance ($10 fix rate × (1,740 AH – 1,800 SH)) Factory Overhead Control 23,400 24,000 23,400 2,600 520 180 600 24,700 Finished Goods (900 units × $65 standard cost) 58,500 Work in Process 58,500 CGA-Canada (adapted) Reprint with permission Chapter 19 19-25 CASES C19-1 (1) The quotation implies that “actual” manufacturing costs form the preferable basis for inventory costing because they were incurred in producing the inventory The notion that actual costs are the only acceptable costs for inventory purposes has been challenged by advocates of standard costs Accountants who advocate using standard costs for reporting purposes believe that standard costs are more representative of the true cost of the product than actual costs They maintain that variances are measures of abnormal inefficiencies or abnormal efficiencies; therefore, variances cannot be inventoried and should be immediately recognized in determining net income of the period rather than prorated to inventories and cost of goods sold Thus, the costs attached to the product are the costs that should have been incurred, not the costs that were incurred Many accountants believe that variances not have to be inventoried as long as standards are currently attainable But if standards are not up to date, or if they reflect theoretical performance rather than performance under reasonably efficient conditions, then, conceptually, the variances should be split between the portion that reflects departures from attainable standards and the portion that does not Most accountants agree that unfavorable variances resulting from the difference between standards based on theoretical performance and those based on normal performance should be treated as product costs and prorated to inventories and cost of goods sold There is less agreement relating to variances resulting from the difference between actual performance and standards based on normal (attainable) performance Standard cost advocates believe that these variances should be expensed because they represent abnormal conditions Many other accountants believe that these variances represent part of the actual cost of producing the goods and, therefore, should be treated as product costs and prorated to inventories and cost of goods sold (2) The three most appropriate alternative methods of variance disposition require the following entries: (a) Cost of Goods Sold 500 Finished Goods Inventory 1,000 Variance (b) Cost of Goods Sold 1,500 Variance (c) Finished Goods Inventory 1,500 Variance would 1,500 1,500 1,500 19-26 Chapter 19 C19-1 (Concluded) (3) The first journal entry is in accordance with the discussion in part (1) as the most appropriate method of handling variances Cost of Goods Sold is charged with the excess cost above what it should have taken to complete the project, based on a normal (attainable) standard The costs (variances) resulting from the difference between the theoretical standard and the normal standard should be prorated to cost of goods sold and inventories, based on the relative proportion of the associated cost contained in each In the situation presented, the entire $1,000 is charged to Finished Goods Inventory instead of being prorated to inventories and cost and goods sold because the production is included solely in finished goods inventory The second journal entry can be justified as an appropriate method for disposition of the variance primarily on practical considerations but has little theoretical justification The practice of charging all variances to Cost of Goods Sold (or against current revenue) often has been justified on the grounds of simplicity, convenience, and immateriality The last entry would be appropriate where it is desired to adjust the standard cost inventory to actual costs Many accountants would advocate this entry in the circumstances presented because the inventory would then be stated at actual costs of production However, when this method of variance disposition is followed, the asset inventory will be carried on the financial statements at an amount that exceeds the cost that should have been incurred Thus, inefficiencies in operations are being capitalized as assets in the financial statements when this method is applied ... inventory costing because they were incurred in producing the inventory The notion that actual costs are the only acceptable costs for inventory purposes has been challenged by advocates of standard costs... units × $2) Cost of goods sold at standard cost: Materials (1,500 units × $7) Direct labor (1,500 units × $8) Factory overhead (1,500 units × $2) Total mfg cost at standard cost Less work... process, Dec 31, 20— Cost of goods manufactured at standard cost Add: Variance allocation Allocation of discounts lost on purchases Cost of goods manufactured at actual cost Direct