Question

Wallis Company manufactures only one product and uses a standard cost system. The company uses a predetermined plantwide overhead rate that relies on direct labor-hours as the allocation base. All of the company's manufacturing overhead costs are fixed—it does not incur any variable manufacturing overhead costs. The predetermined overhead rate is based on a cost formula that estimated $2,924,000 of fixed manufacturing overhead for an estimated allocation base of 292,400 direct labor-hours. Wallis does not maintain any beginning or ending work in process inventory. The company’s beginning balance sheet is as follows: Wallis Company Balance Sheet 1/1/XX (dollars in thousands) Assets Cash $ 900 Raw materials inventory 350 Finished goods inventory 470 Property, plant, and equipment, net 10,500 Total assets $ 12,220 Liabilities and Equity Retained earnings $ 12,220 Total liabilities and equity $ 12,220 The company’s standard cost card for its only product is as follows: Inputs (1) Standard Quantity or Hours (2) Standard Price or Rate Standard Cost (1) × (2) Direct materials 2 pounds $ 34.00 per pound $ 68.00 Direct labor 3.00 hours $ 13.00 per hour 39.00 Fixed manufacturing overhead 3.00 hours $ 10.00 per hour 30.00 Total standard cost per unit $ 137.00 During the year Wallis completed the following transactions: Purchased (with cash) 240,000 pounds of raw material at a price of $31.50 per pound. Added 220,000 pounds of raw material to work in process to produce 97,000 units. Assigned direct labor costs to work in process. The direct laborers (who were paid in cash) worked 249,000 hours at an average cost of $16.00 per hour to manufacture 97,000 units. Applied fixed overhead to work in process inventory using the predetermined overhead rate multiplied by the number of direct labor-hours allowed to manufacture 97,000 units. Actual fixed overhead costs for the year were $2,750,000. Of this total, $1,360,000 related to items such as insurance, utilities, and salaried indirect laborers that were all paid in cash and $1,390,000 related to depreciation of equipment. Transferred 97,000 units from work in process to finished goods. Sold (for cash) 94,000 units to customers at a price of $170 per unit. Transferred the standard cost associated with the 94,000 units sold from finished goods to cost of goods sold. Paid $2,130,000 of selling and administrative expenses. 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. Record transactions a through i for Wallis Company. 3. Compute the ending balances for Wallis Company’s balance sheet. 4. Prepare Wallis Company’s income statement for the year.

Answer 1

1. Calculation of Variances

a) Direct Material

Direct Material Price Variance = Actual Quantity Purchased( Standard Rate - Actual Rate)

= 240000($34-$31.50)

=$ 600000 Favourable

Direct Material Usage Variance

= Standard Rate ( Standard Qty for Actual production - actual Qty)

= $34( 194000-220000)

=$ 884000 (Adverse)

b) Direct Labour

Labour Rate Variance = Direct Labour Hours ( Standard Rate - Actual Rate)

= 249000($13-$16)

=$ 747000 Adverse

Labour Efficiency Variance = Standard Rate ( Standard Hours for actual Production - Actual Hours)

= $13((3*97000)-249000)

= 546000$ Favourable

c) Fixed Overhead Cost variance

= Budgeted Overhead - Actual overhead

= (Direct labour hours * Budgeted Rate )- Actual Overhead

= (249000*10) - 2750000

= $ 260000