Section II: Inventory Management The information below represents the beginning
ID: 2462199 • Letter: S
Question
Section II: Inventory Management
The information below represents the beginning and ending inventory amounts along with the production and sales for the month in umbrella units.
Beginning Inventory: 0 Umbrellas
Production: 80,000 Umbrellas
Sales: 60,000 Umbrellas
Ending Inventory: 20,000 Umbrellas
Using the information provided above and the costs and sales information provided in Section I, complete the following in the Hampshire Company Spreadsheet in order to assist you in responding to all components of Section II:
Prepare a variable costing income statement.
Prepare an absorption costing income statement.
Section III: Benchmarking
The management of the Hampshire Company would like to implement benchmarking. Standard costs have been established and are presented below. You will want to complete a variance analysis to include efficiency and price variances for materials (cloth and handle assemblies) and labor based on the following data:
Units Produced = 80,000
Units Sold = 60,000
Direct Materials Purchased and Used
Actual square yards of cloth purchased and used: 128,000
Actual price incurred per yard: $1.25
Actual handles purchased and used: 80,808
Actual price per handle/rib/stretcher assembly: $0.99
Direct Manufacturing Labor Used
Actual direct labor hours used: 15,748
Actual price per hour: $7.62
Direct labor costs: $120,000
Standard Rates
Standard labor hours per unit: 0.20
Standard labor price per hour: $7.50
Square yards material per unit: 1.50
Standard price per yard: $1.15
Handle/rib/stretcher assembly per unit: 1
Standard price per handle assembly: $1.05
Companies can use variance analysis and benchmarking to measure performance within their own company and against competitors. This can be done by setting standards/budgets and comparing a completed variance analysis to results from prior periods or comparing them to competitors’ results. Using the information provided above, complete the following calculations (steps 1 and 2) in the Hampshire Company Spreadsheet. This will assist you in responding to all components of Section III.
Calculate price variances for material and labor and denote whether they are favorable or unfavorable.
Calculate efficiency variances for material and labor and denote whether they are favorable or unfavorable.
Explanation / Answer
section-2
section 3
It is a problem on standard costing. The company has fixed up standard quantity of cloth rerquired and handle required per unit of goods produced. Also their standard rates are there. You have to compare them with actual cost to get the variance. Calculatons are shown below.
1. Actual quantity produced x standard yeards per unit x standard rate per yard
= 80,000 x 1.50 yards x $1.15 = $138,000
2. Actual quantity x actual yards used per unit x standard rate per yard
=128,000 yards x $1.15 = $147,200
3. Actual quantity of yards used x actual rate per yard
= 128,000 yards x $1.25 per yard = $160,000
Therfore:
total material cost variance = (1) - (3) = $138,000 - $160,000 = -$22,000 (adverse)
Total quantity variance = (1) - (2) = $138,000 - $147,200 = -$9,200 ( adverse)
Total price variance = (2) - (3) = $147,200 - $160,000 = -$12,800 (adverse)
Thus company has operated ineffecietly. It has used cloth more than standard quantity and also purchased them at higher price. Hence material cost is more than stanndard.
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Now consider hanle cost. Compare it with benchmark cost and identify variance with reasons. It is shown below:
1. quantity produced x standard quantity per unit x standard rate per unit
= 80,000 x 1 unit x $1.05 = $84,000
2. Actual handlw used x standard rate
80,808 x $1.05 = $84,848.4
3. actual quantity used x actual rate
80,808 x $0.99 = $79,999.92
Therefore,
Total handle cost variance = (1) - 93) = $84,000 - $79,999.92 = $4,000.08 (favorable)
Volume variance = (1) - (2) = $84,000 - 84,848.4 = -$848.4 ( adverse)
Price variance = (2) - (3) = $84,848.4 - $79,999.92 = $4,818.48 (favorable)
Here actual consumption quantity is more than prescribed in the standard. So volume variance is adverse. But the materials are purchased at lower rate. So price variance is favorable. Also overall variance is favorable.
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finally compare labor cost actually incurred with the standard. It is shown below:
1. Actual production x standard hours per unit x standard rate per hour
=80,000 units x 0.20 hours x $7.50= $120,000
2. Actual production x actual hours used per unit x standard rate per hour
=15,748 hours x $7.50 = $118,110
3. Actual hours used x actual rate per hour
=$120,000
Therefore,
Total direct labor cost variance = (1) - (3) = $120,000-$120,000= 0
Effeciency variance = (1) - (2) = $120,000 - $118,110 = $1,890 (Favorable)
Rate of pay variance = (2) - (3) = $118,110 - $120,000 = -$1,890 (adverse)
Here company has used less hours to manufacture the product. So it has operated effeciently. But as the wage rate is higher than standard rate of variance is adverse. However tese two variances are of same amoiunt with opposite sign. So ultimately there is no total labor cost variance.
Requirement 1 Hampshire Company Variable Costing Income Statement Units $ $ $ Sales 60,000 12.50 750,000 Variable Cost of Goods Sold: Beginning Inventory - Direct Materials 80,000 3.00 240,000 Direct Labor 80,000 1.50 120,000 Manufacturing Overhead 80,000 0.40 32,000 Total Variable Costs 392,000 Cost of Good Available for Sale 80,000 4.90 392,000 Deduct Ending Inventory 20,000 4.90 98,000 Variable Costs of Goods Sold 294,000 Variable Selling Costs 60,000 1.10 66,000 66,000 Contribution Margin 390,000 Fixed Costs: Fixed Manufacturing Costs 216,000 Fixed Administrative Costs 79,525 Operating Income 94,475Related Questions
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