Question

Edney Company employs a standard cost system for product costing. The per-unit standard cost of its product is:

Raw materials	$	14.50
Direct labor (2 direct labor hours × $8.00 per hour)		16.00
Manufacturing overhead (2 direct labor hours × $11.00 per hour)		22.00
Total standard cost per unit	$	52.50

The manufacturing overhead rate is based on a normal capacity level of 600,000 direct labor hours. (Normal capacity is defined as the level of capacity needed to satisfy average customer demand over a period of two to four years. Operationally, this level of capacity would take into consideration sales trends and both seasonal and cyclical factors affecting demand.) The firm has the following annual manufacturing overhead budget:

Variable	$	3,600,000
Fixed		3,000,000
	$	6,600,000

Edney incurred $433,350 in direct labor cost for 53,500 direct labor hours to manufacture 26,000 units in November. Other costs incurred in November include $260,000 for fixed manufacturing overhead and $315,000 for variable manufacturing overhead.

The company uses a single account, Factory Overhead, to record all overhead costs. Assume that the actual variable manufacturing overhead consists of utilities payable of $165,000, indirect materials of $100,000 (all materials, direct and indirect, are recorded in a single account, Materials Inventory), and $50,000 depreciation on factory equipment (determined under the units-of-production method). Assume that the fixed manufacturing overhead consists of accrued (i.e, unpaid) salaries of $60,000 and factory depreciation of $200,000. All unpaid salaries should be recorded in a single account, Accrued Payroll.

Required:

1. . Prepare the following four journal entries: (a) to record actual variable overhead costs, (b) to record actual fixed overhead costs, (c) to record standard overhead costs applied to production, and (d) to record all four overhead cost variances.

2. Prepare the appropriate journal entry to close all manufacturing overhead variances to the cost of goods sold (CGS) account. (Assume the cost variances you calculated above are for the year, not the month.)

Answer 1

	Calculation of Standard variable manufacturing Overhead cost per hour:-
	Budgeted variable manufacturing Overhead per year					$      3,600,000
Less:	Budgeted Direct labor hours per year					600,000
	Standard variable manufacturing Overhead per hour					$                6.00
	Calculation of Budgeted Direct labor hours per November:-
	Budgeted Direct labor hours per year					600,000
	No. of months in a year					12
	Budgeted Direct labor hours for November			600000/12		50,000
	Calculation of Budgeted fixed manufacturing Overhead cost per hour:-
	Budgeted Total manufacturing Overhead cost per hour					$              11.00
Less:	Budgeted variable manufacturing Overhead cost per hour					$                6.00
	Budgeted fixed manufacturing Overhead cost per hour					$                5.00
	Calculation of Standard overhead costs applied to production:-
	Standard variable manufacturing Overhead per hour					$                6.00
	Standard Direct labor hours		26000 units*2			52,000
	Standard variable manufacturing Overhead for November			52000*6		$          312,000
Add:	Fixed manufacturing Overhead applied for November			53500*5		$          267,500
	Standard overhead costs applied to production:-					$          579,500
a.	Fixed Overhead Volume Variance :-
	Fixed Overhead Volume Variance		=	Budgeted overhead rate	× (	Budgeted Labor Hours	-	Standard Labor Hours for actual production	)
			=	$5.00	× (	50,000	-	52,000	)
			=	$5.00	×	-2000
			=	-$10,000		Favorable
b.	Fixed Overhead Spending Variance :-
	Fixed Overhead Spending Variance		=	Actual fixed overhead	-	Budgeted fixed overhead
			=	$          260,000	-	3000000/12
			=	$          260,000	-	$          250,000
			=	$10,000		Unfavorable
c.	Variable Overhead Price Variance :-
	Variable overhead Price Variance		=	Actual labor hours	× (	Actual Rate	-	Standard Rate	)
			=	53500	× (	315000/53500	-	6.00	)
			=	53500	× (	5.89	-	6.00	)
			=	53500	×	-0.11
			=	-$6,000		Favorable
d.	Variable Overhead Quantity Variance :-
	Variable overhead Quantity Variance		=	Standard Rate	× (	Actual labor hours	-	Standard labor hours	)
			=	6.00	× (	53500	-	52,000	)
			=	6.00	×	1,500
			=	$9,000		Unfavorable
e.	Total Factory Overhead Variance :-
	Fixed Overhead Volume Variance		=	-$10,000		Favorable
	Fixed Overhead Spending Variance		=	$10,000		Unfavorable
	Variable overhead Price Variance		=	-$6,000		Favorable
	Variable overhead Quantity Variance		=	$9,000		Unfavorable
	Total Factory Overhead Variance		=	$3,000		Unfavorable

Feel free to ask any clarification, if required. Please provide feedback by thumbs up, if satisfied. It will be highly appreciated. Thank you.