Comprehensive review of Chapters 7 and 8, working backward from given variances.

Question

Comprehensive review of Chapters 7 and 8, working backward from given variances. The Gallo Company uses a flexible budget and standard costs to aid planning and control of its machining manufacturing operations. Its costing system for manufacturing has two direct-cost categories (direct materials and direct manufacturing labor-both variable) and two overhead-cost categories (variable manufacturing overhead and fixed manufacturing overhead, both allocated using direct manufacturing labor-hours). At the 50,000 budgeted direct manufacturing labor-hour level for August, budgeted direct manufacturing labor is $1,250,000, budgeted variable manufacturing overhead is $500,000, and budgeted fixed manufacturing overhead is $1,000,000. The following actual results are for August: The standard cost per pound of direct materials is $11.50. The standard allowance is 6 pounds of direct materials for each unit of product. During August, 20,000 units of product were produced. There was no beginning inventory of direct materials. There was no beginning or ending work in process. In August, the direct materials price variance was $1.10 per pound. In July, labor unrest caused a major slowdown in the pace of production, resulting in an unfavorable direct manufacturing labor efficiency variance of $40,000. There was no direct manufacturing labor price variance. Labor unrest persisted into August. Some workers quit. Their replacements had to be hired at higher wage rates, which had to be extended to all workers. The actual average wage rate in August exceeded the standard average wage rate by $0.50 per hour. 1. Compute the following for August: a. Total pounds of direct materials purchased b. Total number of pounds of excess direct materials used c. Variable manufacturing overhead spending variance d. Total number of actual direct manufacturing labor-hours used e. Total number of standard direct manufacturing labor-hours allowed for the units produced f. Production-volume variance 2. Describe how Gallo's control of variable manufacturing overhead items differs from its control of fixed manufacturing overhead items

Explanation / Answer

1. a.

Total Pounds of Direct Material Purchased would be as follows:
No. of Units Produced in August: 20,000 Units.
Standard Units of Raw Material Required for manufacture of per unit of Finished Goods: 6 Pounds per Unit.
Standard Quanity for 20,000 Units = 20,000 x 6 Pounds = 120,000
Standard Price per pound of Direct Material = $ 11.50/Pound
Direct Material Efficiency Variance = (Actual Quantity - Standard Quantity) x Standard Price
or, Direct Material Efficiency Variance = $ 75,900 = (Actual Quantity - 120,000) x $11.50
or, Actual Quantity = 126,600 Pounds of Direct Material.

1. b.

Total No. of Pounds of Excess Direct Material Used:
Standard No. of Units Per unit of Finished Good: 6 Pounds/Units
Actual Production: 20,000 Units
Standard No. of Units of Direct Material Required for above Actual Production: 20,000 x 6 Pounds: 120,000 Pounds.
Actual Pounds of Direct Material Used for Actual Production: 126,600 Pounds.
Excess Direct Material Used with respect to the Standard Usage : 126,600 - 120,000 Pounds = 6600 Pounds.

1. c.

Variable Manufacturing Overhead Spending Variance:
The variable overhead spending variance is the difference between the actual and budgeted rates of spending on variable overhead. It may be calculated as follows:
Actual hours worked x (Actual overhead rate - standard overhead rate)
or, 51,810 x (9.85 - $10.00) = $ 7,770

Note:
i. Direct Manufacturing Labour Efficiency Variance =
or, (Actual Hours - Standard Hours ) x Standard Rate =
or, (Actual Hours - 50,000) x $25 = ($40,000) UF
or, Actual Hours for July = 51,600 Hours
or, 2.58 Hours Per Unit of Finished Goods as Actual Hours vs Standard Hours of 2.5 Hours per Unit of Finished Good.
Standard Direct Labour Hours: 50,000 Hours for 20,000 Units

ii. Standard Variable Overhead Rate = $500,000 / 50,000 Hours. = $ 10 Per hour.

iii. Actual Overhead Rate =
Variable Manufacturing Overhead Flexible Budget Variance = Actual Variable Manufacturing Overhead - (Actual Output x (Budgeted Overhead/Budgeted Output)= $ 10,400 Unfavourable
or, Actual Variable Manufacturing Overhead - (20,000 x (500,000 / 20,000) = ($ 10,400)
or, Actual Variable Manufacturing Overhead = $ 510,400.

Variable Overhead Efficiency Variance = Standard overhead rate x (Actual hours - standard hours) = (18,100)
or, $10 x (Actual Hours for August - 50,000) = 18,100
or, Actual Hours for August = 51,810 Hours.

Actual Overhead Rate for August = $510,400 / 51810 Hours = $9.85 per Hour.

1. d.

Total No. of Actual Direct Manufacturing Labour Hours Used: 51,810 Hours

Note:
Variable Overhead Efficiency Variance = Standard overhead rate x (Actual hours - standard hours) = (18,100)
or, $10 x (Actual Hours for August - 50,000) = 18,100
or, Actual Hours for August = 51,810 Hours.

1. e.

Total No. of Standard Direct Manufacturing Labour Hours allowed for the units produced:
Units Produced : 20,000
Standard Hours: 50,000 Hours

2.
Gallo's control over variable manufacturing Overhead Items differs from Fixed Manufacturing Overhead differed in the followed manner:
Fixed costs are always identified first when creating a budget so a base cost can be established. It is often difficult to cut fixed costs either in overhead or production. Variable costs are the difficulty that causes risk in a company by making budgeting difficult, since variable costs are more difficult to control.
The same can be seen in case of Gallo, where the FIxed Cost went favourable when compared with the budget, but the Variable Costs went in the Unfavourable side. Mainly due to inefficiency of the labour due the labour unrest. THis shows that Budgeting and Predicting Variable Overheads are more difficult, as they can get affected by any unruly situations or favourable situations. They are required to be kept dynamic.
Further if budgeting is inaccurate, the company may incur costs that decrease profits. This is why variable cost control generally results in cutback of variable overhead costs when business slows.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.