Question

Forsyth Company manufactures one product, it does not maintain any beginning or ending inventories, and its uses a standard cost system. During the year, the company produced and sold 10,000 units at a price of $154 per unit. Its standard cost per unit produced is $124 and its selling and administrative expenses totaled $244,500. Forsyth does not have any variable manufacturing overhead costs and it recorded the following variances during the year:

Materials price variance	$	8,400	F
Materials quantity variance	$	12,100	U
Labor rate variance	$	5,400	U
Labor efficiency variance	$	6,300	F
Fixed overhead budget variance	$	4,400	F
Fixed overhead volume variance	$	13,900	F

Required:

1. When Forsyth closes its standard cost variances, the cost of goods sold will increase (decrease) by how much?

2. Prepare an income statement for the year.

Answer 1

Total overhead variance ;

Materials price variance	8400 F
Materials quantity variance	12100 U
Labor rate variance	5400 U
Labor efficiency variance	6300 F
Fixed overhead budget variance	4400 F
Fixed overhead volume variance	13900 F
Total overhead variance	15500 F

Cost of goods sold will decrease by 15500.

2) Prepare an income statement for the year.

Sales		1540000
Cost of goods sold (standard)	1240000
Less: Total variance favorable	-15500
Cost of goods sold (actual)		-1224500
Gross profit		315500
Less: Selling and administrative expense		-244500
Net operating income		71000