Ultra, Inc. manufactures and sells a full line of sunglasses. The company uses a
ID: 2597675 • Letter: U
Question
Ultra, Inc. manufactures and sells a full line of sunglasses. The company uses a standard cost system. Department managers' are held responsible for the explanation of the variances in their department performance reports. Recently, the variances in the Prestige line of sunglasses have been of concern. Data for the month of August is presented below. Assume beginning and ending inventory levels for WiP and FG are zero Static Budget $600,000 $150,000 $135,000 $114,000 $201,000 Actual $575,000 $145,000 $142,000 $111,000 $177,000 revenues DM DL FOH (cost driver = DL hours) gross profit selling price per Prestige sunglass DM (total # ounces) DL rate ( per DL hour $76.923 15,600 $18.00 $78.767 16,000 $14.20Explanation / Answer
Static budget is based on 7800 sunglasses (600000/76.923) Standard cost data: Direct materal price per ounce=150000/15600=$9.62 per ounce Ounce required per sunglasses=15600/7800=2 ounce Hours required for 7800 sunglasses=135000/18=7500 hours Hours required for 1 sunglass=7500/7800=7500 hours=0.96 hours Fixed overhead absorption rate=114000/7500=$15.2 per hour Actual cost data Actual units of sunglasses=575000/78.767=7300 sunglasses Actual hours=142000/14.20=10000 hours Direct materal price per ounce=145000/16000=$9.06 per ounce Standard quantity allowed for actual unit=7300*2=14600 ounce. Account titles Debit Credit 1) DM inventory (AQ*SP) (16000*9.6) 153600 DM spending variance 8600 accounts payable (Actual cost) 145000 ( purchase of DM) 2) WiP inventory (SQ*SP) (14600*9.62) 140452 DM efficiency variance 13468 DM inventory (AQ*SP) (16000*9.62) 153920 (release of DM into production) 3) DL expense 142000 wages payable 142000 (Actual cost incurred) WiP inventory (SH*SR) (7008*18) 126144 DL efficiency variance (Note:1) 53856 DL spending variance (Note:2) 38000 DL expense 142000 (Recording variances) 4) FOH expenses 111000 accounts payable 111000 (Actual fixed overhead incurred) mfg FOH control 111000 FOH expenses 111000 (Transferred to mfg FOH control account) WiP inventory (AH*FOH Rate) (10000*15.2) 152000 mfg FOH control 152000 (Applied fixed overhead) mfg FOH control 41000 FOH volume variance (Note:3) 38000 FOH spending variance (Note:4) 3000 (Recorded variance) 5) DM spending variance 8600 DM efficiency variance 13468 DL spending variance 38000 DL efficiency variances 53856 FOH volume variance 38000 FOH spending variance 3000 CGS 20276 (Closing of variances Notes:1 Labor rate variance=Actual hours*(Standard rate-Actual rate) Labor rate variance=10000*(18-14.20)=38000 F Notes:2 Labor efficiency variance=(Standard hours required-Actual hours)*Standard rate Standard hours required=Actual production*Standard hours per sunglass Standard hours required=7300*0.96=7008 hours Labor efficiency variance=(7008-10000)*18=53856 U Notes:3 Fixed overhead volume variance=Applied fixed overhead-Budgeted fixed overhead=(10000*15.2)-(114000)=38000 F Notes:4 Fixed overhead spending variance=Actual fixed overhead-Budgeted fixed overhead=111000-114000=3000 F
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