E23-24 Preparing a standard cost income statement
Learning Objective 6
GP $1,002,990
All-Star Fender, which uses a standard cost system, manufactured 20,000 boat fenders during 2016. The
2016 revenue and cost information for All-Star follows:
Assume each fender produced was sold for the standard price of $60, and total selling and administrative
costs were $350,000. Prepare a standard cost income statement for 2016 for All-Star Fender.
SOLUTION
ALL-STAR FENDER
Standard Cost Income Statement
For the Year Ended December 31, 2016
Problems (Group A)
P23-25A Preparing a flexible budget performance report
Learning Objective 1
1. Static Bud. Var. for Op. Inc. $20,800 F
Small Talk Technologies manufactures capacitors for cellular base stations and other communications
applications. The company’s July 2016 flexible budget shows output levels of 7,500, 9,000, and 11,000
units. The static budget was based on expected sales of 9,000 units.
The company sold 11,000 units during July, and its actual operating income was as follows:
Requirements
1. Prepare a flexible budget performance report for July.
2. What was the effect on Small Talk’s operating income of selling 2,000 units more than the static
budget level of sales?
3. What is Small Talk’s static budget variance for operating income?
4. Explain why the flexible budget performance report provides more useful information to Small
Talk’s managers than the simple static budget variance. What insights can Small Talk’s managers
draw from this performance report?
SOLUTION
Requirement 1
1
2
(1) – (3)
3
4
(3) – (5)
5
Budget
Amounts
per Unit
Actual
Results
Flexible
Budget
Variance
Flexible
Budget
Sales
Volume
Variance
Static
Budget
$ 271,000
28,000
20,000
Requirement 2
Selling 2,000 units more than the static budget level of sales increased Small Talk’s operating income by
Requirement 3
P23-25A, cont.
Requirement 4
The static budget is prepared for only one level of sales volume—the 9,000 units expected to be sold—
and it doesn’t change after it is developed. The $20,800 favorable static budget variance is the difference
between actual operating income ($57,800), based on 11,000 units actually sold, and the expected
operating income ($37,000) in the static budget, based on 9,000 units expected to be sold. The flexible
budget performance report (Requirement 1) provides more useful information than the simple static
budget variance because it separates the $20,800 favorable static budget variance into its components:
the $800 favorable flexible budget variance and the $20,000 favorable sales volume variance.
The overall $800 favorable flexible budget variance is the difference between actual operating income
($57,800) for the 11,000 units actually sold and expected operating income ($57,000) in the flexible
budget for the 11,000 units actually sold. Because the $7,000 favorable flexible budget variance for sales
revenue was $800 greater than the sum of the unfavorable flexible budget variances for variable
expenses ($5,200) and fixed expenses ($1,000), the overall flexible budget variance (for operating
income) was $800 favorable. The individual flexible budget variances arise because actual sales price
per unit, variable expense per unit, and fixed expenses were different from those expected for the 11,000
units actually sold.
• The $7,000 favorable flexible budget variance for sales revenue was favorable because the
P23-26A Preparing a flexible budget computing standard cost variances
Learning Objectives 1, 3, 4
2. VOH Eff. Var. $1,377 U
Kyler Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system.
Kyler allocates overhead based on yards of direct materials. The company’s performance report includes
the following selected data:
Requirements
1. Prepare a flexible budget based on the actual number of recliners sold.
2. Compute the cost variance and the efficiency variance for direct materials and for direct labor. For
manufacturing overhead, compute the variable overhead cost, variable overhead efficiency, fixed
overhead cost, and fixed overhead volume variances. Round to the nearest dollar.
3. Have Kyler’s managers done a good job or a poor job controlling materials, labor, and overhead
costs? Why?
4. Describe how Kyler’s managers can benefit from the standard cost system.
SOLUTION
Requirement 1
KYLER RECLINERS
Flexible Budget
Actual Units (Recliners)
Sales
Variable Manufacturing Costs:
Direct Materials
Direct Labor
Variable Overhead
Fixed Manufacturing Costs:
Fixed Overhead
Total Cost of Goods Sold
Gross Profit
Budget
Amounts
(a)
$ 54,735
/
1,025 recliners
=
$53.40 per recliner
(b)
$ 92,250
/
1,025 recliners
=
$ 90.00 per recliner
(c)
$ 31,365
/
1,025 recliners
=
$ 30.60 per recliner
(d)
$495.00 per recliner
×
1,005 recliners
=
$ 497,475
(e)
$ 53.40 per recliner
×
1,005 recliners
=
$ 53,667
$ 90.00 per recliner
×
1,005 recliners
=
$ 90,450
(g)
$ 30.60 per recliner
×
1,005 recliners
=
$ 30,753
Requirement 2
Direct Materials Cost Variance
=
(AC ̶ SC)
×
AQ
=
($8.70 per yard – $8.90 per yard)
×
6,300 yards
=
$1,260 F
=
×
$8.90 per yard
=
$2,403 U
=
×
AQ
=
×
=
$985 U
P23-26A, cont.
Requirement 2, cont
Direct Labor Efficiency Variance
=
(AQ ̶ SQ)
×
SC
=
(9,850 DLHr – 10,050 DLHr(b))
×
$9.00 per DLHr
=
$1,800 F
=
×
=
×
6,300 yards
=
$8,820 U
=
×
=
$1,377 U
FOH Cost Variance
=
Actual FOH
̶
Budgeted FOH
=
$64,730
̶
$62,730
=
$2,000 U
=
̶
Allocated FOH
=
$62,730
̶
=
$1,224 U
1,025 recliners
=
6 yards per recliner
Thus:
×
1,005 recliners
=
6,030 yards
1,025 recliners
=
10 DLHr per recliner
Thus:
10 DLHr per recliner
×
1,005 recliners
=
10,050 DLHr
6,150 yards
=
$10.20 per yard
Thus:
×
6,030 yards
=
$61,506
P23-26A, cont.
Requirement 3
The $1,260 favorable direct materials cost variance indicates that Kyler’s managers did a good job
keeping actual direct materials cost per yard within standard. The $8.70 actual cost per yard was less
than the $8.90 standard cost per yard.
The $1,800 favorable direct labor efficiency variance indicates that Kyler’s managers did a good job
keeping actual usage of direct labor hours within standard. The 9,850 total direct labor hours actually
used was less than the 10,050 total direct labor hours allowed to manufacture 1,005 recliners.
The $8,820 unfavorable variable overhead cost variance indicates that Kyler’s managers did not do a
good job keeping actual variable overhead cost per yard within standard. The $6.50 actual cost per yard
was greater than the $5.10 standard cost per yard (the standard variable overhead allocation rate per
yard).
P23-26A, cont.
Requirement 4
Kyler’s managers can benefit from the standard costing system in the following ways:
• Preparing the master budget.
P23-27A Computing standard cost variances and reporting to management
Learning Objectives 3, 4, 5
1. DM Eff. Var. $640 F
Smart Hearing manufactures headphone cases. During September 2016, the company produced and sold
108,000 cases and recorded the following cost data:
Actual Cost Information
Requirements
1. Compute the cost and efficiency variances for direct materials and direct labor.
2. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the
fixed overhead cost and volume variances.
3. Smart Hearing’s management used better quality materials during September. Discuss the trade-off
between the two direct material variances.
SOLUTION
Requirement 1
Direct Materials Cost Variance
=
(AC ̶ SC)
×
AQ
=
($0.21 per part – $0.16 per part)
×
212,000 parts
=
$10,600 U
=
×
=
$640 F
=
×
=
$249 U
=
×
=
$4,000 F
×
108,000 cases
=
216,000 parts
×
108,000 cases
=
2,160 DLHr
P23-27A, cont.
Requirement 2
VOH Cost Variance
=
Actual VOH
−
(SC × AQ)
=
$8,000
−
($9 per DLHr × 1,660 DLHr)
=
$6,940 F
=
×
$9 per DLHr
=
$4,500 F
=
$2,320 F
=
$3,400 F
×
2,160 DLHr
=
$36,720
Requirement 3
There may be trade-offs between the direct materials cost variance and the direct materials efficiency
variance. Decisions made by the purchasing manager may affect the direct materials efficiency variance
for the production manager. Perhaps Smart Hearing used better quality direct materials, indicated by the
fact that the $0.21 actual direct materials cost per part was greater than the $0.16 direct materials
P23-28A Computing and journalizing standard cost variances
Learning Objectives 3, 4, 5, 6
3. VOH Cost Var. $1,980 F
Juda manufactures coffee mugs that it sells to other companies for customizing with their own logos.
Juda prepares flexible budgets and uses a standard cost system to control manufacturing costs. The
standard unit cost of a coffee mug is based on static budget volume of 59,800 coffee mugs per month:
Actual cost and production information for July 2016 follows:
a. There were no beginning or ending inventory balances. All expenditures were on account.
Requirements
1. Compute the cost and efficiency variances for direct materials and direct labor.
2. Journalize the purchase and usage of direct materials and the assignment of direct labor, including
the related variances.
3. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the
fixed overhead cost and volume variances.
4. Journalize the actual manufacturing overhead and the allocated manufacturing overhead. Journalize
the movement of all production costs from Work-in-Process Inventory. Journalize the adjusting of
the Manufacturing Overhead account.
5. Juda intentionally hired more highly skilled workers during July. How did this decision affect the
cost variances? Overall, was the decision wise?
SOLUTION
Requirement 1
Direct Materials Cost Variance
=
(AC ̶ SC)
×
AQ
=
($0.17 per lb. – $0.25 per lb.)
×
10,000 lbs.
=
$800 F
=
×
$0.25 per lb.
=
$625 F
=
×
=
$3,960 U
=
×
=
$1,365 U
×
62,500 mugs
=
12,500 lbs.
$29,700 total cost
198,000 minutes
=
$0.15 cost per minute
3 minutes per mug
×
62,500 mugs
=
187,500 minutes
P23-28A, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Raw Materials Inventory ($0.25/lb. × 10,000 lbs.)
2,500
Direct Materials Cost Variance (from Req. 1)
800
Accounts Payable ($0.17/lb. × 10,000 lbs.)
1,700
Purchased direct materials.
3,125
Direct Materials Efficiency Variance (from Req. 1)
625
Raw Materials Inventory ($0.25/lb. × 10,000 lbs.)
2,500
Used direct materials.
Direct Labor Cost Variance (from Req. 1)
3,960
Direct Labor Efficiency Variance (from Req. 1)
1,365
Wages Payable ($0.15/min. × 198,000 min.)
Direct labor costs incurred.
Requirement 3
VOH Cost Variance
=
Actual VOH
−
(SC × AQ)
=
$9,900
−
($0.06 per min. × 198,000 min.)
=
$1,980 F
=
×
=
$630 U
=
$5,884 U
=
$1,134 F
×
59,800 mugs
=
$25,116
×
3 min. per mug
×
62,500 mugs
=
$26,250
P23-28A, cont.
Requirement 4
Date
Accounts and Explanation
Debit
Credit
Manufacturing Overhead ($9,900 VOH + $31,000 FOH)
40,900
Various Accounts
40,900
Manufacturing overhead costs incurred.
37,500
Manufacturing Overhead
37,500
Manufacturing overhead costs allocated.
Finished Goods Inventory ($3,125 + $24,375 + $37,500)
65,000
65,000
Completed goods transferred.
Variable Overhead Efficiency Variance (from Req. 3)
Fixed Overhead Cost Variance (from Req. 3)
To adjust Manufacturing Overhead.
Requirement 5
Because Juda hired more skilled workers, the $0.15 actual direct labor cost per minute was greater than
the $0.13 direct labor standard cost per minute. Therefore, the direct labor cost variance was $3,960
unfavorable for the 62,500 mugs actually produced. Hiring more skilled direct labor workers could be
Note: Problem P23-28A must be completed before attempting Problem P23-29A.
P23-29A Preparing a standard cost income statement
Learning Objective 6
COGS at actual $72,300
Review your results from Problem P23-28A. Juda’s standard and actual sales price per mug is $3.
Prepare the standard cost income statement for July 2016.
SOLUTION
JUDA
Standard Cost Income Statement
For the Month Ended July 31, 2016
Sales Revenue at standard ($3/mug × 62,500 mugs)
$ 187,500
Cost of Goods Sold at standard (from P23-28A)
$ 65,000
Manufacturing Cost Variances (from P23-28A):
$ (800)
Cost of Goods Sold at actual
Gross Profit
Selling and Administrative Expenses
Operating Income / (Loss)
$ (4,800)
Problems (Group B)
P23-30B Preparing a flexible budget performance report
Learning Objective 1
1. Static Bud. Var. for Op. Inc. $24,500 F
Cellular Technologies manufactures capacitors for cellular base stations and other communication
applications. The company’s July 2016 flexible budget shows output levels of 7,500, 9,000, and 11,000
units. The static budget was based on expected sales of 9,000 units.
The company sold 11,000 units during July, and its actual operating income was as follows:
Requirements
1. Prepare a flexible budget performance report for July 2016.
2. What was the effect on Cellular’s operating income of selling 2,000 units more than the static budget
level of sales?
3. What is Cellular’s static budget variance for operating income?
4. Explain why the flexible budget performance report provides more useful information to Cellular’s
managers than the simple static budget variance. What insights can Cellular’s managers draw from
this performance report?
SOLUTION
Requirement 1
1
2
(1) – (3)
3
4
(3) – (5)
5
Budget
Amounts
per Unit
Actual
Results
Flexible
Budget
Variance
Flexible
Budget
Sales
Volume
Variance
Static
Budget
$ 282,000
$ 275,000
26,000
24,000
Requirement 2
Selling 2,000 units more than the static budget level of sales increased Cellular’s operating income by
$24,000 (which is the $24,000 favorable sales volume variance calculated in Requirement 1).
Requirement 3
P23-30B, cont.
Requirement 4
The static budget is prepared for only one level of sales volume—the 9,000 units expected to be sold—
and it doesn’t change after it is developed. The $24,500 favorable static budget variance is the difference
The primary reason for the favorable operating income results is that the 11,000 units actually sold was
more than the 9,000 units expected to be sold in the static budget. The overall $24,000 favorable sales
The overall $500 favorable flexible budget variance is the difference between actual operating income
($76,500) for the 11,000 units actually sold and expected operating income ($76,000) in the flexible
budget for the 11,000 units actually sold. Because the $7,000 favorable flexible budget variance for sales
revenue was $500 greater than the sum of the unfavorable flexible budget variances for variable
expenses ($5,000) and fixed expenses ($1,500), the overall flexible budget variance (for operating
income) was $500 favorable. The individual flexible budget variances arise because actual sales price
per unit, variable expense per unit, and fixed expenses were different from those expected for the 11,000
units actually sold.
• The $7,000 favorable flexible budget variance for sales revenue was favorable because the
$25.64 ($282,000 / 11,000 units, rounded) actual sales price per unit was higher than the $25 per
unit budgeted.
P23-31B Preparing a flexible budget and computing standard cost variances
Learning Objectives 1, 3, 4
2. VOH Eff. Var. $1,315 U
Root Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system.
Root allocates overhead based on yards of direct materials. The company’s performance report includes
the following selected data:
Requirements
1. Prepare a flexible budget based on the actual number of recliners sold.
2. Compute the cost variance and the efficiency variance for direct materials and for direct labor. For
manufacturing overhead, compute the variable overhead cost, variable overhead efficiency, fixed
overhead cost, and fixed overhead volume variances. Round to the nearest dollar.
3. Have Root’s managers done a good job or a poor job controlling materials, labor, and overhead
costs? Why?
4. Describe how Root’s managers can benefit from the standard cost system.