Question

# McKnight Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system. McKnight allocates...

McKnight Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system. McKnight allocates overhead based on yards of direct materials. The? company's performance report includes the following selected? data:

 Static Budget Actual Results (1,000 recliners) (980 recliners) Sales (1,000 recliners x \$500 each) \$500,000 (980 recliners x \$475 each) \$465,500 Variable Manufacturing Costs: Direct Materials (6,000 yds. @ \$8.50 / yd.) 51,000 (6,143 yds. @ \$8.30 / yd.) 50,987 Direct Labor (10,000 DLHr @ \$9.30 / DLHr) 93,000 (9,600 DLHr @ \$9.40 / DLHr) 90,240 Variable Overhead (6,000 yds. @ \$5.20 / yd.) 31,200 (6,143 yds. @ \$6.60 / yd.) 40,544 Fixed Manufacturing Costs: Fixed Overhead 60,600 62,600 Total Cost of Goods Sold 235,800 244,371 Gross Profit \$264,200 \$221,129
 1 Prepare a flexible budget based on the actual number of recliners sold. 2 Compute the cost variance and the efficiency variance for direct materials and for direct labor. For manufacturing? overhead, compute the variable overhead? cost, variable overhead? efficiency, fixed overhead? cost, and fixed overhead volume variances. Round to the nearest dollar. 3 Have McKnight?'s managers done a good job or a poor job controlling?materials, labor, and overhead? costs? Why? 4 Describe how McKnight?'s managers can benefit from the standard costing system.

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 Par-1. Flexible Budget Working Flexible Budget (980 Recliners) Sales 980*500 490000 Variable Manufacturing Cost: -Direct Material 6143*8.5 52216 -Direct Labor 9600*9.3 89280 -Variable Overhead 6143*5.2 31944 Fixed Manufacturing Cost: -Fixed Overheads 60600 Total Cost of Goods Sold 234039 Gross Profit 255961 Part 2: Variances F/N Material Price Variance 6143*(8.30-8.50) 1229 Favorable Material Quantity Variance 8.5*(6143-6000/1000*980) 2236 Unfavorable Labor Price Variance 9600*(9.40-9.30) 960 Unfavorable Labor Efficiency Variance 9.3*(9600-10000/1000*980) 1860 Favorable Variable Ovh Rate Variance 6143*(6.60-5.20) 8600 Unfavorable Variable Efficiency Variance 5.2*(6143-6000/1000*980) 1368 Unfavorable Fixed Overhead Rate Variance 62600-60600 2000 Unfavorable Fixed Overhead Volume Variance 60600-(980*60600/1000) 1212 Unfavorable (Budgeted-Allocated) Part-3 Manager have done reasonably good job in controllng Material and Labor cost as unfavorable variance is being almost offset by favorable variance in these two cases. However, manager could have done better in case of controlling Overhead cost where we have unfavorable variance only for Rate and Volume. Part-4 Standard help Managers/Employee to know the target level. Knowing the target wil help to control the cost. Standard help management to plan by setting unit cost which in return will help to prepare flexible and static budget

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