Pioli Corporation manufactures one product. It does not maintain any beginning or ending Work in Process inventories. The company uses a standard cost system in which inventories are recorded at their standard costs and any variances are closed directly to Cost of Goods Sold. There is no variable manufacturing overhead. The standard cost card for the company’s only product is as follows:

Pioli Corporation manufactures one product. It does not maintain any beginning or ending Work in Process inventories. The company uses a standard cost system in which inventories are recorded at their standard costs and any variances are closed directly to Cost of Goods Sold. There is no variable manufacturing overhead. The standard cost card for the company’s only product is as follows:

The standard fixed manufacturing overhead rate was based on budgeted fixed manufacturing overhead of $60,000 and budgeted activity of 10,000 hours.

During the year, the company completed the following transactions:

1. Purchased 13,300 kilos of raw material at a price of $2.40 per kilo.
2. Used 17,300 kilos of the raw material to produce 14,500 units of work in process.
3. Assigned direct labor costs to work in process. The direct labor workers (who were paid in cash) worked 6,550 hours at an average cost of $25.80 per hour.
4. Applied fixed overhead to the 14,500 units in work in process inventory using the predetermined overhead rate multiplied by the number of direct labor-hours allowed. Actual fixed overhead costs for the year were $143,350. Of this total, $59,890 related to items such as insurance, utilities, and indirect labor salaries that were all paid in cash and $83,460 related to depreciation of manufacturing equipment.
5. Transferred 14,500 units from work in process to finished goods.
6. Sold for cash 15,100 units to customers at a price of $52.40 per unit.
7. Completed and transferred the standard cost associated with the 15,100 units sold from finished goods to cost of goods sold.
8. Paid $44,070 of selling and administrative expenses.
9. Closed all standard cost variances to cost of goods sold.

Required:

1. Compute all direct materials, direct labor, and fixed overhead variances for the year.

2 and 3. Record the above transactions in the worksheet that appears below. Because of the width of the worksheet, it is in two parts. In your text, these two parts would be joined side-by-side to make one very wide worksheet. The beginning balances have been provided for each of the accounts, including the Property, Plant, and Equipment (net) account which is abbreviated as PP&E (net) and Determine the ending balance (e.g., 12/31 balance) in each account.

 

4. Prepare an income statement for the year.

Explanation

1.

Materials price variance = AQ × (AP – SP)

= 13,300 kilos × ($2.40 per kilo – $3 per kilo)

= 13,300 kilos × (-$0.60 per kilo)

= $7,980 F

Materials quantity variance:

SQ = Actual output × Standard quantity = 14,500 units × 1 kilos per unit = 17,400 kilos

Materials quantity variance = (AQ – SQ) × SP

= (17,300 kilos – 17,400 kilos) × $3.00 per kilo

= (-100 kilos) × $3.00 per kilo

= $300 F

Labor rate variance = AH × (AR – SR)

= 6,550 hours × ($25.80 per hour – $25.00 per hour)

= 6,550 hours × ($0.80 per hour)

= $5,240 U

Labor efficiency variance:

SH = Actual output × Standard quantity = 14,500 units × 0.50 hours per unit = 7,250 hours

Labor efficiency variance = (AH – SH) × SR

= (6,550 hours – 7,250 hours) × $25.00 per hour

= (-700 hours) × $25.00 per hour

= $17,500 F

Budget variance = Actual fixed overhead – Budgeted fixed overhead

= $143,350 – $60,000

= $83,350 U

Volume variance = Budgeted fixed overhead – Fixed overhead applied to work in process

= $60,000 – (7,250 hours × $6.00 per hour)

= $60,000 – ($43,500)

= $16,500 U

2. and 3.

The explanations for transactions a through i are as follows:

1. Cash decreases by the actual cost of the raw materials purchased, which is AQ × AP = 13,300 kilos × $2.4 per kilo = $31,920. Raw Materials increase by the standard cost of the raw materials purchased, which is AQ × SP = 13,300 kilos × $3.00 per kilo = $39,900. The materials price variance is $7,980 F.
2. Raw Materials decrease by the standard cost of the raw materials used in production, which is AQ × SP = 17,300 kilos × $3.00 per kilo = $51,900. Work in Process increases by the standard cost of the standard quantity of raw materials allowed for the actual output, which is SQ × SP = (14,500 units × 1.2 kilos per unit) × $3.0 per kilo = 17,400 kilos × $3.00 per kilo = $52,200. The difference is the Materials Quantity Variance which is $300 F.
3. Cash decreases by the actual amount paid to direct laborers, which is AH × AR = 6,550 hours × $25.80 per hour = $168,990. Work in Process increases by the standard cost of the standard amount of hours allowed for the actual output, which is SH × SR = (14,500 units × 0.5 hours per unit) × $25.00 per hour = 7,250 hours × $25.00 per hour = $181,250. The difference consists of the Labor Rate Variance which is $5,240 U and the Labor Efficiency Variance which is $17,500 F.
4. Cash decreases by the actual amount paid for various fixed overhead costs, which is $59,890. Work in Process increases by the standard amount of hours allowed for the actual output multiplied by the predetermined overhead rate, which is (14,500 units × 0.5 hours per unit) × $6.00 per hour = 7,250 hours × $6.00 per hour = $43,500. PP&E (net) decreases by the amount of depreciation for the period, which is $83,460. The difference is the Fixed Overhead (FOH) Budget Variance which is $83,350 U and the Fixed Overhead (FOH) Volume Variance which is $16,500 U.
5. Work in Process decreases by the number of units transferred to Finished Goods multiplied by the standard cost per unit = 14,500 units × $19.10 per unit = $276,950. Finished Goods increases by the same amount.
6. Cash increases by the number of units sold multiplied by the selling price per unit, which is 15,100 units × $52.40 per unit = $791,240. Retained Earnings increases by the same amount.
7. Finished Goods decreases by the number of units sold multiplied by their standard cost per unit, which is 15,100 units × $19.10 per unit = $288,410. Retained Earnings decreases by the same amount.
8. Cash and Retained Earnings decrease by $44,070 to record the selling and administrative expenses.
9. All variance accounts take their balance to zero and they are closed to Cost of Goods Sold (which resides within Retained Earnings).

Thanks