Johnny Lee, Inc., produces a line of small gasoline-powered engines that can be
ID: 2530364 • Letter: J
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 manufacturing overhead costs, which seem to be growing faster than revenues. Currently, the company uses machine hours (MH) 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 fixed overhead costs per month should occur: engineering support, $15,600; insurance on the manufacturing facility, $5,600; property taxes on the manufacturing facility, $12,600; depreciation on manufacturing equipment, $14,400; indirect labor costs: supervisory salaries, $13,700; setup labor, $3,000; materials handling, $3,100. Variable overhead costs are budgeted at $24.00 per machine hour, as follows: electricity, $8.00; indirect materials Material A $1.00, Material B- $5.00; maintenance labor, $7.00; and manufacturing supplies, $3.00 Assume that in a given month the standard allowed machine hours for output produced are 6,100. Also, assume that the denominator activity level for setting the predetermined overhead rate is 6,800 machine hours per month Actual fixed overhead costs for the month are as follows: engineering support, $17,300 (salaries); factory insurance, $7,300; property taxes, $12,600; equipment depreciation, $14,400; supervisory salaries, $13,700; setup labor, $4,000; materials-handling labor, $4,200. The actual variable overhead cost per machine hour worked is equal to the standard cost except for the following two items: electricity, $8.50 per machine hour, manufacturing supplies, $3.10 per machine hour. The company used 6,200 machine hours in December The company uses a single overhead account, Factory Overhead, and performs a two-way analysis of the total overhead cost variance each month Required: 1. Calculate the (a) flexible-budget variance, and (b) the fixed overhead production volume variance for the month. (Hint: The total overhead variance for the month is $18,620U.) Flexible-budget variance Fixed overhead production volume varianceExplanation / Answer
Solution:
The Following data in the calculation of various variances:
1) Calculation of the (a) Flexible Budget Variance and (b) the Fixed Overhead Production Volume Variance for the Month:
The flexible-budget variance and the fixed overhead production volume variance for the month are calculated as below:
Total Overhead Cost Variance = Actual Overhead Cost - Standard Overhead Applied = (6,200*24.60 + 73,500) - [6,100*(24+10)] = $18,620 (Unfavorable)
The total overhead cost variance is split into (a) flexible-budget variance, and (b) the fixed overhead production volume variance for the month as follows:
Flexible Budget Variance = Actual Overhead Cost - (Budgeted Fixed Overhead + Budgeted Variable Overhead) = (6,200*24.60 + 73,500) - (68,000 + 6,100*24) = $11,620 (Unfavorable)
Fixed Overhead Production Volume Variance = (Denominator Activity Level - Standard Allowed Machine Hours for Units Produced)*Standard Fixed Overhead Rate Per Machine Hour = (6,800 - 6,100)*10 = $7,000 (Unfavorable)
2) Preparing the Journal Entries to record the actual overhead costs and standard overhead cost applied to production during the month:
3) Preparing the journal entry to record the two overhead cost variances for the month and the journal entry to close these variances to the Cost of Goods Sold (CGS) account:
Fixed Overhead Cost Per Month: Budget Actual Engineering Support (salaries) 15,600 17,300 Factory Insurance 5,600 7,300 Property Taxes (Factory) 12,600 12,600 Equipment Depreciation (Factory) 14,400 14,400 Supervisory Salaries (Factory) 13,700 13,700 Set-up Labor 3,000 4,000 Materials-Handling Labor 3,100 4,200 Totals $68,000 $73,500Related Questions
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