The Company Uses A Standard Cost System Based On Manufacturi

The Company Uses A Standard Cost System Based On Manufacturing 5000 T

The Company Uses A Standard Cost System Based On Manufacturing 5000 T

The company utilizes a standard cost system based on manufacturing 5,000 tents per month. In May, actual production was 4,840 tents. Standard and actual costs for materials, labor, and overhead are provided. The management policy mandates investigating all variances exceeding 3% from standard. This paper calculates the variances for materials, labor, and overhead, determines their favorability, and provides journal entries for overhead application, actual overhead, variances, and closing the overhead account.

Paper For Above instruction

Introduction

Standard cost systems are widely used in manufacturing to control costs, analyze performance, and facilitate budgeting. By comparing actual costs to standard costs, organizations can identify variances that signal efficiency or inefficiency. This analysis focuses on a company producing tents, with a specific emphasis on calculating variances in materials, labor, and overhead for May, when actual production slightly fell short of the standard. The goal is to assess cost control effectiveness and financial performance through meticulous variance analysis and accounting journal entries.

Standard and Actual Data Overview

Cost Element Standard Actual
Materials 18 yards at $3.20 per yard 86,550 yards at $3.25 per yard
Labor 6.5 hours at $16.00 per hour 32,100 hours at $15.80 per hour
Overhead $12.00 per tent Actual overhead $56,750

Standard output per month is 5,000 tents, but actual production for May was 4,840 tents, which influences computing various variances, especially volume variances related to overhead.

1. Material and Labor Variances

Material Variances

Standard material cost for 4,840 tents:

  • Standard quantity = 18 yards/tent x 4,840 tents = 87,120 yards
  • Standard cost = 87,120 yards x $3.20 = $278,784

Actual material cost:

  • 86,550 yards x $3.25 = $281,287.50
Material Price Variance (MPV)

MPV = (Actual Price - Standard Price) x Actual Quantity

= ($3.25 - $3.20) x 86,550 = $0.05 x 86,550 = $4,327.50 (Unfavorable)

Material Quantity Variance (MQV)

MQV = (Actual Quantity - Standard Quantity) x Standard Price

= (86,550 - 87,120) x $3.20 = (-570) x $3.20 = -$1,824 (Favorable)

Total Material Variance = MPV + MQV = $4,327.50 (U) - $1,824 (F) = $2,503.50 (Unfavorable)

Labor Variances

Standard labor cost for 4,840 tents:

  • Standard hours = 6.5 hours/tent x 4,840 tents = 31,460 hours
  • Standard cost = 31,460 hours x $16.00 = $503,360

Actual labor cost:

  • 32,100 hours x $15.80 = $507,780
Labor Price Variance (LPV)

LPV = (Actual Rate - Standard Rate) x Actual Hours

= ($15.80 - $16.00) x 32,100 = (-$0.20) x 32,100 = -$6,420 (Favorable)

Labor Quantity Variance (LQV)

LQV = (Actual Hours - Standard Hours) x Standard Rate

= (32,100 - 31,460) x $16.00 = 640 x $16.00 = $10,240 (Unfavorable)

Total Labor Variance = LPV + LQV = -$6,420 (F) + $10,240 (U) = $3,820 (Unfavorable)

2. Overhead Variances

Overhead Applied

Overhead rate per tent = $12.00

Applied overhead = $12.00 x 4,840 = $58,080

Total Actual Overhead = $56,750

Variance Analysis

Total Overhead Variance (OHV)

= Actual Overhead - Applied Overhead = $56,750 - $58,080 = -$1,330 (Favorable)

Overhead Volume Variance (OVV)

Standard overhead for actual production:

  • Standard overhead rate per tent = $12.00
  • Standard production at standard rate = 5,000 tents
  • Standard total overhead = 5,000 x $12.00 = $60,000

Applied overhead based on standard capacity:

  • Standard hours per tent = 6.5 hours
  • Total standard hours = 5,000 x 6.5 = 32,500 hours

Since overhead is applied per unit, the volume variance computes based on actual volume:

  • Standard overhead for actual tents (4,840) at standard rate = 4,840 x $12.00 = $58,080
  • Variance = (Standard overhead - Applied overhead) = ($60,000 - $58,080) = $1,920 (Unfavorable)

Alternatively, because overhead is applied at a fixed rate per unit, the volume variance is mainly derived from the difference in units produced relative to standard. Since actual production is less, the variance is unfavorable.

3. Journal Entries

Application of Overhead

Debit Work-in-Process Inventory $58,080


Credit Manufacturing Overhead $58,080

Actual Overhead Incurred

Debit Manufacturing Overhead $56,750


Credit Various $56,750

Close Overapplied or Underapplied Overhead

Since applied overhead ($58,080) is greater than actual ($56,750), overhead is overapplied by $1,330.

Debit Manufacturing Overhead $1,330


Credit Cost of Goods Sold $1,330

Adjustments for Variances

Recording variances involves closing them to Cost of Goods Sold or allocating to Work-in-Process, depending on company policy. For simplicity, assume variances are closed directly to COGS.

Conclusion

The variance analysis indicates minor unfavorable variances in materials and labor, with favorable overhead variances primarily due to underapplied overhead. Management should investigate material price increases and labor efficiency, while noting that overall costs are within acceptable ranges, given the variance thresholds. Proper journal entries ensure accurate financial reporting and reflect variance adjustments appropriately.

References

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