Management And Accounting Web

# Management Accounting: Concepts, Techniques & Controversial Issues Chapter 4 Class Problem and Solution

James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Part I. The Moon Company had the following transactions during January of 200X.

 SalesCost of direct material used usedDirect labor cost incurredSales salariesAdministrative salariesOther administrative costsOther factory overhead costs incurredOther selling costsEnding finished goodsPurchases of materialsIndirect labor costs incurredNet factory payroll after withholdingCost of indirect materials usedCost of jobs completedBeginning finished goodsNormal spoilage:Common to all jobsCaused by customer's specifications Disposal value of all spoilageFactory overhead rate per D.L. hourDirect labor hours used during the period \$200,00040,00010,0006,0006,00010,00020,0005,0006,00050,0005,00012,0004,00060,0005,000300200100 103,000

Required: General journal entries to record the following:

1. The purchase of materials.
2. Material usage.
3. The factory payroll.
4. The payment of the factory payroll to employees.
5. The distribution of payroll costs.
7. Spoilage.
8. Cost of goods sold.
9. Sales.

Note on entry 3: 10,000 DL + 5,000 IL = 15,000 Factory payroll. Since net pay is given as \$12,000, withholding must be \$3,000.

Note on entry 6: Applied overhead is (\$10)(3,000 DL hours) = \$30,000.

Note on entry 7: Both normal spoilage and abnormal spoilage share credit for the disposal value. The customer is left with \$200 - \$40 = \$160. Since customers' specifications caused 2/5 of the spoilage, they get credit for 2/5 of the disposal value. Factory overhead is charged with \$300 - \$60 = \$240. Since normal spoilage represents 3/5 of the spoilage, 3/5 of the disposal value is subtracted from 300 to obtain the amount to charge to factory overhead.

Note on entry 8. \$5,000 Beginning FG + \$60,000 COGM - \$6,000 EFG = \$59,000 COGS.

Part II

Ignore your previous answers and assume that the total actual overhead was \$30,000 and included \$11,700 variable overhead and \$18,300 fixed overhead. Assume the \$10 factory overhead rate per direct labor hour represents \$4 of variable overhead and \$6 of fixed overhead. Also assume that these rates were based on 3,100 denominator direct labor hours. Note: actual D.L. hours are still 3,000.

Required: Calculate the following variances and indicate if each variance is favorable or unfavorable.