Question

Johnny Lee Inc. produces a line of small gasoline-powered engines that can be used in a variety of residential machines, ranging from different types of lawnmowers, to snowblowers, to garden tools (such as tillers and weed-whackers). The basic product line consists of three different models, each meant to fill the needs of a different market. Assume you are the cost accountant for this company and that you have been asked by the owner of the company to construct a flexible budget for factory overhead costs, which seem to be growing faster than revenues. Currently, the company uses machine hours (MHs) as the basis for assigning both variable and fixed factory overhead costs to products. Within the relevant range of output, you determine that the following factory fixed overhead costs per month should occur: engineering support, $15,000; insurance on the manufacturing facility, $5,000; property taxes on the manufacturing facility, $12,000; depreciation on manufacturing equipment, $13,800; and indirect labor costs of supervisory salaries, $14,800, setup labor, $2,400, and materials handling, $2,500. Variable factory overhead costs are budgeted at $21.00 per machine hour, as follows: electricity, $8.00; indirect materials for Material A of $1.00 and for Material B of $4.00; indirect labor-maintenance, $6.00; and production-related supplies, $2.00. Assume that in a given month (December) the standard allowed machine hours for output produced was 5,500. Also, assume that the denominator activity level for setting the predetermined overhead application rate is 6,550 machine hours per month. Actual fixed overhead costs for the month of December were as follows: engineering support, $15,500 (salaries); factory insurance, $5,500; property taxes, $12,000; equipment depreciation, $13,800; supervisory salaries, $14,800; setup labor, $2,200; materials handling labor, $2,400. The actual variable overhead cost per machine hour worked in December was equal to the standard cost except for the following two items: electricity, $8.50 per machine hour; and manufacturing supplies, $2.10 per machine hour. All salary and wage amounts have not yet been paid. The company used 5,600 machine hours in December. The company uses a single overhead account, Factory Overhead, and performs a two-way analysis of the total factory overhead cost variance each month. Required: 1. Calculate the (a) total factory overhead cost variance, (b) total flexible-budget variance, and (c) the production volume variance for the month. State whether each variance was favorable (F) or unfavorable (U). 2. Provide the summary journal entry to record (separately) each of the following: (a) actual variable overhead costs, (b) actual fixed overhead costs, and (c) standard variable overhead cost applied to production, and (d) standard fixed overhead cost applied to production. Note: Accrued payroll costs are recorded in Salaries and Wages Payable, while transactions regarding indirect materials and manufacturing supplies are recorded in the Indirect Materials Inventory account. 3. Provide a single journal entry to record the two factory overhead cost variances for the month. 4. Assume that the variances calculated above represent net overhead cost variances for the year. Provide the required journal entry to close these two variances to the Cost of Goods Sold (CGS) account.

Answer 1

Particulars	Budgeted	Actual
Machine hours	6,550	5,600
Engineering Support	15,000	15,500
Insurance on the manufacturing facility	5,000	5,500
Property taxes on the manufacturing facility	12,000	12,000
Depreciation on manufacturing equipment	13,800	13,800
The indirect labor cost of Supervisory salaries	14,800	14,800
Set up labor cost	2,400	2,200
Material handling	2,500	2,400
Total fixed overhead cost (1)	65,500	66,200
Budgeted hours (2)	6,550	5,600
Standard absorption rate per machine hour (1)/(2)	10	12
Variable cost per machine hour	21	21.60
Total cost per machine hour( Standard )	31	33.42

(1) (a)Total fixed cost variance = Actual fixed overhead - Budgeted fixed Overhead

=$ 66,200-65,500

=$700 (F)

(b) Total flexible budget variance = Actual hours (Budgeted OH rate - Actual OH rate)

=$ 5,600(31-33.42)

=$ 13,560 (U)

(C) Production volume variance = ( Actual machine hours - Budgeted machine hours ) * standard absorption rate

= $ (5,600-6,550)*31

=$ 29,450 (U)

(2) , (3), & (4 ) Journal entries in the books of Johnny Lee Inc ( It is assumed that company is following standard costing method)

Particulars	Debit ($)	Credit ($)
Factory OH cost A/c Dr	49,000
To payable/Overhead control a/c		49,000
(Being actual fixed production overhead booked other than salary and material handling cost)
Factory OH cost A/c Dr	14,800
To Salaries & Wages payable A/c		14,800
(Being actual indirect cost booked)
Factory OH cost A/c Dr	2,400
To Indirect material Inventory A/c		2,400
(Being actual indirect cost booked)
Factory OH cost A/c Dr	120,960
To payable/Overhead control a/c		120,960
(Being variable production overhead booked 5600*21.6=1,20,960)
Work-in -progress cost A/c (5,500 *10) Dr	55,000
To Factory OH A/c		55,000
(Being standard fixed overheads transferred to cost)
Work-in -progress cost A/c (5,500 *21) Dr	115,500
To Factory OH A/c		115,500
(Being standard variable overheads transferred to cost)
(3) Costing P/L A/c Dr	16,660
To Factory OH A/c		16,660
(Being under-recovery of overhead charged to profit & loss a/c)
(4) Cost of goods sold A/c                                                                                   Dr	170,500
To Work-in-progress cost A/c		170,500
(Being cost transferred to COGS )