unit 6 chapter 11

EXERCISE 15 LO.3 (DM variances) In November 2008, Day Time Publishing

Company’s costs and quantities of paper consumed in manufacturing its 2009 Executive
Planner and Calendar were as follow: Actual unit purchase price $0.065 per page
Standard unit price $0.070 per page Standard quantity for good production 195,800 pages
Actual quantity purchased during November 230,000 pages Actual quantity used in
November 200,000 pages a. Calculate the total cost of purchases for November. b.
Compute the material price variance (based on quantity purchased). c. Calculate the
material quantity variance.

a. Total purchases = AP × AQp = $0.065 × 230,000 =

$14,950

b. Material price variance = (AP × AQp) (SP × AQ)

= $14,950 ($.07 × 230,000)
= $14,950 $16,100
= $1,150 F

c. Material quantity variance = (SP × AQu) (SP × SQ)

= ($0.07 × 200,000) ($0.07 × 195,800)
= $14,000 $13,706
= $294 U

EXERCISE 21 LO.3 (OH variances) Joy Ride Corp. has a fully automated production
facility in which almost 97 percent of overhead costs are driven by machine hours. As the
company’s cost accountant, you have computed the following overhead variances for
May: Variable overhead spending variance $17,000F Variable overhead efficiency
variance 20,000F Fixed overhead spending variance 14,000U Fixed overhead volume
variance 10,000U The company’s president is concerned about the variance amounts and
has asked you to show her how the variances were computed and to answer several
questions. Budgeted fixed overhead for the month is $500,000; the predetermined
variable and fixed overhead rates are, respectively, $10 and $20 per machine hour.
Budgeted capacity is 10,000 unites. a. Using the four-variance approach, prepare an
overhead analysis in as much detail as possible. b. What is the standard number of
machine hours allowed for each unit of output? c. How many actual hours were worked
in May? d. What is the total spending variance? e. What additional information about the
manufacturing overhead variances is gained by inserting detailed computations into the
variable and fixed manufacturing overhead variance analysis? f. How would the overhead
variances be closed it the three-variance approach were used?
a. Budgeted machine hours = 500,000 ÷ $20 = 25,000
MHs
Actual machine hours = $224,400 ÷ $10 =
22,440 MHs
Machine hours applied = $490,000 ÷ $20 =
24,500 MHs

Actual VOH VOH Rate x Actual Hours

Applied VOH
$10 × 22,440
$10 × 24,500
$207,400 $ 224,400
$ 245,000

$17,000 F
$20,600 F

VOH Spending Variance VOH

Efficiency Variance

$37,600 F
Total VOH Variance

Actual FOH Budgeted FOH

Applied FOH
$20 x 25,000
$20 x 24,500
$ 514,000 $500,000
$490,000
$14,000 U
$10,000 U
FOH Spending Variance
Volume Variance
$24,000 U
Total FOH Variance

b. Standard machine hours is 25,000 ÷

10,000 units = 2.5 MHs per unit
 c. Actual machine hours worked is $224,400 ÷
$10 = 22,440

d. Total spending variance is $17,000 -

$14,000 = $3,000 F
e. The VOH favorable efficiency variance resulted
from using 2,560 fewer machine hours than allowed
given production of 10,000 units. The FOH volume
variance resulted from underutilizing capacity by 500
machine hours.
f. OH Spending Variance 3,000
VOH Efficiency Variance20,600
Volume Variance 10,000
Cost of Goods Sold
13,600
To dispose of overhead variances

EXERCISE 17 LO.3 (Allocating joint cost) In one joint process, Hardahl Chemical
produces three joint products and one by-product. The following information is available
for September 2008: Sales Value at Cost after Final Selling Products Gallons Split-Off
per Gallon Split-Off Price JP-4539 4,000 $12 $3 $21 JP-4587 16,000 8 5 14 JP-4591
12,000 15 2 19 Allocate the joint cost of $465,000 to the production based on the a.
number of gallons; b. sales value at split-off; and c. approximate net realizable value at
split-off. (Round all percentages to the nearest whole percentage)

a. JP-4539 4,000 .125 x $465,000 = $ 58,125

JP-4587 16,000 .500 x $465,000 = 232,500
JP-4591 12,000 .375 x $465,000 = 174,375
32,000 1.000 $465,000

b. JP-4539 4,000 x $12 = $ 48,000 .13 x $465,000 =

$ 60,450
JP-4587 16,000 x $ 8 = 128,000 .36 x $465,000 =
167,400
JP-4591 12,000 x $15 = 180,000 .51 x $465,000
= 237,150
$356,000 1.00 $465,000

c. JP-4539 4,000 x ($21 - $3) = $ 72,000 .17 x

$465,000 = $ 79,050
JP-4587 16,000 x ($14 - $5) = 144,000 .34 x
$465,000 = 158,100
 JP-4591 12,000 x ($19 - $2) = 204000 .49 x
$465,000 = 227,850
$420,000 1.00 $465,000

EXERCISE 20 LO.3 (Processing beyond split-off) Washington Cannery makes three

products from a single joint process. For 2008, the cannery processed all three products
beyond split-off. The following data were generated for the year: Joint Product
Incremental Separate Cost Total Revenue Candied apples $26,000 $620,000 Apple jelly
38,000 740,000 Apple jam 15,000 270,000 Analysis of 2008 market data reveals that
candid apples, apple jelly, and apple jam could have been sold at split-off for $642,000,
$706,000, and $253,000, respectively. a. Based on hindsight, evaluate management’s
production decisions in 2008. b. How much additional profit could the company have
generated in 2008 if it had made optimal decisions at split off?

a. Final Split-off Increm. Increm.

Increm.
Product Revenues Sales Value Revenue Costs
Profit
Candied
apples $620,000 $642,000 ($22,000) $26,000
$(48,000)
Apple
jelly 740,000 706,000 34,000 38,000
(4,000)
Apple
jam 270,000 253,000 17,000 15,000 2,000

Management should not have further processed candied

apples and apple jelly because the incremental costs from
further processing was greater than the incremental
revenues. These two products should have been sold at the
split-off point.

b. Candied apples $48,000

Apple jelly 4,000
Additional potential profit $52,000

EXERCISE 27 LO.4 (By-product accounting method selection) Your employer engages

in numerous joint processes that produce significant quantities and type of by-product.
You have been asked to give a report to management on the best way to account for by-
product. Develop a set of criteria for making such a choice and provide reasons for each
criterion selected. On the basis of your criteria, along with any additional assumptions
you wish to provide about the nature of the company you work for, recommended a
particular method of accounting for by-product and explain why you consider it to be
better than the alternatives.

Because the by-product has substantial value, it should be accounted

for using NRV rather than realized value, which would result in
distorted cost information. Whether the direct or indirect method
is used would be dependent on the timing of the sale of by-
product and joint products. If both product groups sell shortly
after they are produced, then the choice of method is less
important. However, if the by-product tends to sell in a different
period than its related joint products, use of the direct method
would provide a stronger match between costs and benefits.