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Chapter 4 Class Problem and Solution

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

Chapter 4 | MAAW's Textbook Table of Contents

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

Cost of direct material used used
Direct labor cost incurred
Sales salaries
Administrative salaries
Other administrative costs
Other factory overhead costs incurred
Other selling costs
Ending finished goods
Purchases of materials
Indirect labor costs incurred
Net factory payroll after withholding
Cost of indirect materials used
Cost of jobs completed
Beginning finished goods
Normal spoilage:
Common to all jobs
Caused by customer's specifications
Disposal value of all spoilage
Factory overhead rate per D.L. hour
Direct labor hours used during the period


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.
6. Applied factory overhead.
7. Spoilage.
8. Cost of goods sold.
9. Sales.

Moon Company Solution

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.

10. The total overhead variance.
11. The total spending variance.
12. The variable overhead spending variance.
13. The fixed overhead spending variance.
14. The idle capacity variance.

Total Overhead Variance