Question

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:

Direct materials (7 lbs. @ $5.40)	$37.80
Direct labor (1.75 hrs. @ $18)	31.50
Variable overhead (1.75 hrs. @ $4.00)	7.00
Fixed overhead (1.75 hrs. @ $3.00)	5.25
Standard unit cost	$81.55

During the year, Petrillo experienced the following activity relative to the production of valves:

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.

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

Answer 1

6) Journal Entries S no. General Journal Credit Debit $731,160 1 Materials Direct Materials Price Variance Accounts Payable $5,416 $725.744 2 Work in Process Direct Materials Usage Variance Materials $778,680 $6,480 $785,160 3 $648,900 $8,100 Work in Process Direct Labor Efficiency Variance Direct Labor Rate Variance Wages Payable $730 $656,2701 4 $13,850 $730 Cost of Goods Sold Direct Labor Rate Variance Direct Materials Usage Variance Direct Labor Efficiency Variance $6,480 $8,100 5 $5,416 Direct Materials Price Variance Cost of Goods Sold $5,416) 6 Variable Overhead Control Miscellaneous Accounts $168,000 $168,000 7 $110,000 Fixed Overhead Control Miscellaneous Accounts $110,000 8 $144,200 Work in Process Variable Overhead Control $144,200 9 $108,1501 Work in Process Fixed Overhead Control $108,150

10 $22,000 $1,800 $5,000 Variable Overhead Spending Variance Variable Overhead Efficiency Variance Fixed Overhead Spending Variance Fixed Overhead Volume Variance Fixed Overhead Control Variable Overhead Control $3,150 $1,850 $23,800 11 $28,8001 Cost of Goods Sold Variable Overhead Efficiency Variance Fixed Overhead Spending Variance Variable Overhead Spending Variance $1,800 $5,000 $22.000 12 $3,150 Fixed Overhead Volume Variance Cost of Goods Sold $3,150

4) Computing the Overhead Variances using a Four Variance Analysis: Variable Overhead Variances: VariableOverheadSpending Variance = ActualVOH - (SVOR* AH) Actual Variable Overhead = $168,000 Standard Variable Overhead Rate = $4.00 Actual Hours = 36,500 VariableOverheadSpendingVariance = $168,000 – ($4.00 * 36,500) VariableOverhead SpendingVariance = $168,000 – ($146, 000) VariableOverheadSpendingVariance = $22,000Un favorable VariableOverhead EfficiencyVariance = (AH – SH) * SVOR Standard Hours (20,600 Units * 1.75hrs) = 36,050 VariableOverhead EfficiencyVariance = (36,500 – 36,050) * $4.00 VariableOverhead EfficiencyVariance = (450) * $4.00 VariableOverhead EfficiencyVariance = $1,800U n favorable Fixed Overhead Variances: FixedOverhead SpendingVariances = Actual FO - (SFOR* AH)

Actual Fixed Overhead = $110,000 Standard Fixed Overhead Rate = $3.00 Actual Hours (20,000 Units * 1.75 hrs) = 35,000 FixedOverhead SpendingVariances = $115,000 – ($3.00 * 35,000) FixedOverhead SpendingVariances = $115,000 – ($105,000) FixedOverhead SpendingVariances = $5,000Un favorable FixedOverhead VolumeVariance = (SFOR * AH) - (SFOR* SH) Standard Hours (20,600 Units * 1.75 hrs.) = 36,050 FixedOverhead VolumeVariance ($3.00 * 35,000) - ($3.00 * 36, 050) FixedOverhead VolumeVariance ($105,000) – ($108, 150) FixedOverhead VolumeVariance = $3,150 Favorable 5) Company has to discontinue the purchase of the inferior direct materials, as it costs the company more. The budgeted cost of direct materials at 20,600 units production level is ($5.40 × 7 × 20,600) = $778,680, and the actual cost was ($725,744 + $54,000) = $779,744. After the detailed analysis the cost overrun was caused by a large, unfavorable usage variance, probably attributable to the lower quality of direct materials.