Question

Forsyth Company manufactures one product, it does not maintain any beginning or ending inventories, and its uses a standard cost system. During the year, the company produced and sold 10,000 units at a price of $141 per unit. Its standard cost per unit produced is $111 and its selling and administrative expenses totaled $238,000. Forsyth does not have any variable manufacturing overhead costs and it recorded the following variances during the year: Materials price variance Materials quantity variance Labor rate variance Labor efficiency variance Fixed overhead budget variance Fixed overhead volume variance $ 7.100 F $10,800 U $ 4,100 U $5.000 T $ 3.100 F $12,600 Required: 1. When Forsyth closes its standard cost variances, the cost of goods sold will increase (decrease) by how much? 2. Prepare an income statement for the year.

Answer 1

Solution: 1 Calculation of the cost of goods sold variance Particulars Amount Materials price variance Materials quantity variance Labor rate variance Labor efficiency variance Fixed overhead budget variance Fixed overhead volume variance Decrease in cost of goods sold $ (7,100.00) 10,800.00 4,100.00 (5,000.00) (3,100.00) $ (12,600.00) $(12,900.00) 2. Forsyth Company Income Statement For the Year Amount Amount Sales Cost of goods sold at standard Total variance adjustments Cost of goods sold Gross margin Selling and administrative expenses Net operating income 1,410,000 1,110,000 (12,900) $ 1,097,100 $ 312,900 $ 238,000 $ 74,900 Sales: 10,000 x $141 = $1,410,000 Cost of goods sold at standard: 10,000 units x $111 = $1,110,000