Emerson Company produces ceramic teapots. Emerson allocates overhead based on th
ID: 2554190 • Letter: E
Question
Emerson Company produces ceramic teapots. Emerson allocates overhead based on the number of direct labor hours. The company is considering using a standard cost system and has developed the following standards (a batch is 100 teapots).
Standard Costs:
Direct Material 60 lbs. per batch $ 5.00 per lb.
Direct Labor 3.0 hr. per batch $17.00 per hr.
Variable Manufacturing Overhead 3.0 hr. $7.00 per hr.
Fixed Manufacturing Overhead 3.0 hr. $3.00 per hr.
2018 Budgeted Data for February:
Budgeted production, 121 batches (100 teapots each batch)
Denominator Hours, 363 DLH. (Emerson applies overhead on the basis of direct labor hours.)
Budgeted variable overhead, $2,541
Budgeted fixed overhead, $1,089.
2018 Actual Results for February:
Direct material purchases were 4,500 lbs. at a cost of $4.70 per lb.
Direct material used was 4,100 lbs.
Direct labor costs was $3,344 at an average direct labor cost per hour of $17.60.
Total variable manufacturing overhead was $1,406.
Total fixed manufacturing overhead was $1,490.
Actual production was 60 batches.
REQUIRED:
1. Calculate the following variances:
a. materials price and quantity variances (Worth 4 pts.).
b. labor rate and efficiency variances (Worth 4 pts.).
c. variable overhead rate(spending) and efficiency variances (Worth 4 pts.).
d. fixed overhead budget and volume variances (Worth 4 pts.).
2. EXTRA CREDIT: (Worth 5 pts) Prepare journal entries for:
a. material price and quantity variances.
b. labor rate and efficiency variances.
3. EXTRA CREDIT: (Worth 6 pts.) Answer the following questions:
1. Have the company’s managers done a good job or a poor job controlling materials, labor, and overhead costs? Why or why not?
2. What do you think may have caused the variances to be favorable or unfavorable? Give 2 examples for each variance you have calculated above
.
3. Describe how the company’s managers can benefit from the standard costing system. Do you think the company should continue with the standard cost system? Why or why not?
Explanation / Answer
1.a) Material price variance = (Standard price – Actual price) x Actual quantity
=> ($5.00 - $4.70) x 4,500 = $1,350 (Favorable)
Quantity variance = (Actual quantity used - Standard quantity used) x Standard cost
=> (4,100 – 3,600) x $5.00 = $2,500 (Unfavorable)
Standard quantity used = Actual production x Standard Direct Material per batch
=> 60 batches x 60 lbs per batch = 3,600 lbs
1.b) Labor rate variance = (Actual rate per labor hour - Standard rate per labor hour) × Actual Hours
=> ($17.60 - $17) x ($3,344/$17.60) = $114 (Unfavorable)
Labor efficiency variance = (Actual hours × Standard rate) – (Standard hours × Standard rate)
=> (190 x $17) – (180 x $17) = $170 (Unfavorable)
Standard hours = Total batches manufactured x Standard labor hours per batch
=> 60 x 3 = 180
1.c) Variable overhead rate(spending) variance = (Standard variable overhead rate – Actual variable overhead rate) × Actual Units
=> ($7 - $7.81) x 60 = -$48.67 (Unfavorable)
Variable overhead efficiency variance = Standard overhead rate x (Actual hours - Standard hours)
=> $7 x (190 – 180) = $70 (Unfavorable)
1.d) Fixed overhead budget variance = Actual fixed overhead - Budgeted fixed overhead
=> $1,490 - $1,089 = $401 (Unfavorable)
Fixed Overhead Volume Variance = Applied Fixed Overhead – Budgeted Fixed Overhead
=> $540 - $1,089 = -$549 (Unfavorable)
Applied Fixed Overhead = (Budgeted Fixed Overhead/Budgeted Units) x Actual units produced
=> ($1,089/121) x 60 = 540
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