Capbell company produces engine parts for large motors. The company uses stardar

Question

Capbell company produces engine parts for large motors. The company uses stardard 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 (7lbs. @5.40) $37.80

Direct Labor (1.75 hrs. @ $18) $31.50

Variable Overhead ( 1.75hrs @ $4.00) $7

Fixed Overhead (1.75 hrs @ $3.00) $5.25

Standard unit cost $81.55

During the year, Campbell had the following activity related to valve production:

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.

Campbell 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.

Required:

1. Compute the direct materials price and usage variances.

2. compute the direct labor hour rate and efficiency variances

3. compute overhead variances using a four variance analysis.

4. prepare journal entries that reflect the following

a) assignment of overhead to production

b) recognition of the incurrence of actual overhead

c. recognition of overhead variances

d. closing out overhead variances, assuming they are not material

Please show all work

Explanation / Answer

1. Material Price variance = Actual material used x (Standard rate- Actual rate) = 135400 x (5.4-5.36) = $5,416 (Fav)

     Material usage variance = (Actual quantity - standard quantity for actual out put ) x standard rate

=    (135400 - 20600 x 7) x$5.4

= (135400-144200) x 5.4 =$47,520(Fav)

2. Direct Labour hour rate variance = (Actual rate - standard rate ) x Actual hours

= ($656,270/36500-18) x 35600 = (17.98-18) x 36500= 730 (Fav)

Direct labour efficiency variance = (Actual Hours - Standard Hours for actual output) x Standard Rate

= (36500 - 20600 x 1.75) x 18

= (36500-36050)x18=$8100 (Unfav)

3. Overhead variances

a. Total variable overhead variance =Actual overhead - Flexible budget Amount *

= $168,000 - 144200 =$23,800 (Unfav.)

* Flexible budget = standard qty for actual production x standard rate = 20600 x 1.75 x 4 =$144200

b.variable overhead spending variance = (Actual Overhead rate - standard overhead rate ) x Actual Qty

= ($168000/36500 - 4) x 36500 = (4.6-4)x36500= $21,900

c. Total Fixed overhead variance = Actual fixed overhead incurred - Fixed overhead applied for actual output

= $110,000 - $5.25x20600=$110,000-108,150=$1,850 (unfav)

Fixed Overhead spending variance = Actual Fixed overhead incurred - budgeted fixed overhead (static budget amount)*

= $110,000- 20000 x 5.25=$110,000-$105000=$5,000 (Unfav)

* static budget = normal activity x standard rate = 20000x5.25

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