There Is Only One Problem This Week On Manufacturing

Sheet1There Is Only One Problem This Week On Manufacturing Varianceap

Sheet1there Is Only One Problem This Week On Manufacturing Varianceap

Sheet1 There is only one problem this week on manufacturing variance. Apollo Sports manufacturers fabric tents. The poles are purchased from a vendor, so the only part manufactured is the actual fabric tent. The company uses a standard cost system based on manufacturing 5,000 tents per month. Overhead is applied on a per-unit basis.

In May, 4,840 tents were produced. Management has a policy that all variances greater than 3% from standard should be investigated. Standard and actual costs are listed below: Standard Direct material 18 yards at $3.20 per yard Direct labor 6.5 hours at $16.00 per hour Overhead applied $12.00 per tent Actual Direct material 86,550 yards at $3.25 per yard Direct labor 32,100 hours at $15.80 per hour Actual overhead $56,750 INSTRUCTIONS: 1. Compute the total, price, and quantity variances for both materials and labor. State if each variance is favorable or unfavorable. 2. Compute the total, volume, and budget overhead variances. State if favorable or unfavorable. 3. Prepare journal entries for the application of overhead, the actual overhead, and to record variances and close the overhead account. Note that on the actual overhead you will not have individual expense account amount, so just list "various" for the expense accounts. 4. Always label all of your work. SOLUTION: First, compute total standard quantity at actual production of 4,840 tents. Direct material 87,120 Direct labor 31,460 Overhead applied 58,080 Total materials variance: (actual qty – actual price) – (standard qty – standard price) 281,784 Materials price variance: (actual qty – actual price) – (actual qty – std price) 281,960 Materials quantity variance: (actual quantity – std price) – (standard qty – std price) 276,784 Total labor variance: (actual hours – actual rate) – (standard hours – standard rate) 507,360 Labor rate variance: (actual hours – actual rate) – (actual hours – std rate) 507,600 Labor quantity variance: (actual hours – std rate) – (standard hours – std rate) 513,360 Total overhead variance: (actual overhead) – (actual quantity – standard rate) 56,080 Overhead volume variance: (actual production qty – std rate) – (standard production qty – std rate) 58,000 Overhead budget variance (total variance – quantity variance) - Journal entries: Application of overhead Debit Credit Work in process Manufacturing overhead Recording actual overhead Manufacturing overhead Various expense accounts Recording variance and closing overhead account Manufacturing overhead Overhead budget variance Overhead question: 1 APA FORTMATTING

Management of Apollo Sports faces several challenges in managing manufacturing variances, which directly impact the company's profitability and operational efficiency. This case provides a comprehensive scenario where detailed variance analysis is imperative for understanding cost control and operational deviations.

Analysis of Manufacturing Variances

Manufacturing variance analysis involves evaluating the differences between actual costs incurred and standard costs expected for a manufacturing process. It aids management in pinpointing areas of inefficiency, controlling costs, and improving production processes.

Materials Variances

The standard cost for direct materials requires 18 yards of fabric at $3.20 per yard per tent, with a total standard material quantity of 87,120 yards for 4,840 tents. The actual material used was 86,550 yards at an average cost of $3.25 per yard. This resulted in a materials price variance and a materials quantity variance.

The materials price variance is calculated as the difference between actual cost and standard cost for actual quantity: ((Actual Price - Standard Price) x Actual Quantity). The actual price per yard was $3.25, exceeding the standard of $3.20, leading to an unfavorable price variance.

The materials quantity variance measures the efficiency of material usage: ((Standard Quantity - Actual Quantity) x Standard Price). The actual usage was slightly below the standard, resulting in a favorable variance.

Labor Variances

The standard labor time is 6.5 hours at $16.00 per hour, with a standard total of 31,460 hours for 4,840 tents. Actual labor hours were 32,100 at an actual rate of $15.80 per hour. The labor rate and efficiency variances are computed accordingly.

The labor rate variance, calculated as ((Actual Hours x Actual Rate) - (Actual Hours x Standard Rate)), is favorable because the actual hourly rate was lower than standard. Conversely, the labor efficiency or usage variance shows whether labor hours were over- or under-utilized relative to standard expectations.

Overhead Variances

Overhead applied was based on per-unit costing, amounting to $12.00 per tent, leading to an applied overhead of $58,080 for 4,840 tents. Actual overhead costs were $56,750. The variances include the total overhead variance, volume variance, and budget variance, which help assess whether overhead costs are under- or over-applied.

The total overhead variance results from the difference between actual overhead and applied overhead, indicating overall efficiency or cost control issues. The volume variance analyzes whether the production volume affects overhead costs, while the budget variance compares budgeted overhead to actual costs incurred.

Significance of Variance Analysis and Ethical Considerations

Effective variance analysis allows management to identify operational issues promptly and implement corrective actions. When variances exceed the 3% threshold, investigation becomes crucial to avoiding cost escalations and ensuring product quality.

Ethically, companies must ensure transparent reporting of variances, as misreporting can mislead stakeholders and mask inefficiencies. Transparency and accountability uphold the integrity of the manufacturing process and foster trust with investors and consumers.

Journal Entries

Appropriate journal entries for overhead application and variance recording are essential for accurate financial reporting. These entries facilitate the closing of variances into cost of goods sold or other relevant accounts, ensuring that financial statements reflect actual performance.

For example, the application of manufacturing overhead involves debiting Work in Process and crediting Manufacturing Overhead. Actual overhead costs recorded as debits to various expense accounts. Variances are then acknowledged through adjusting entries that close out over- or under-applied overhead into Cost of Goods Sold or other accounts.

Conclusion

Manufacturing variance analysis remains a vital component in cost management for manufacturing companies. Accurate and timely identification of variances supports operational improvements and financial accuracy. Ethical management of variance reporting upholds corporate integrity and ensures sustainable business practices.

References

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• BBC Bitesize. (2020). Overhead Cost Variance Analysis. https://www.bbc.co.uk/bitesize