Work4Me Managerial Accounting Simulations 1 st Web-Based Edition Problem Nine Flexible Budgeting and Overhead South Yuba Milling Company Page 1
INTRODUCTION You will enter transactions involving (1) the purchase of raw materials and the transfer of the raw materials to work-in-process inventory, recognizing direct material price and direct material quantity variances, (2) the actual cost of direct labor, recognizing labor rate and labor efficiency variances, and (3) record the month-end manufacturing overhead costs, recognizing the overhead spending variance and overhead volume variance for the South Yuba Milling Company For this problem, the chart of accounts will be limited to key accounts related to this problem. CHART OF ACCOUNTS ASSETS 101 Cash 115 Finished-Goods Inventory 117 Raw-Material Inventory 119 Work-in-Process Inventory 127 Factory Supplies 131 Factory Equipment 132 Accum. Depreciation Factory Equipment 140 Factory 142 Accum. Depreciation Factory LIABILITIES 201 Accounts Payable 205 Wages Payable 209 Income Taxes Payable 210 Short-Term Notes Payable 240 Mortgage Notes Payable STOCKHOLDER EQUITY ACCOUNTS 301 Common Stock 303 Preferred Stock 310 Retained Earnings 401 Sales REVENUE ACCOUNTS Page 2
EXPENSE ACCOUNTS 501 Cost of Goods Sold 502 Manufacturing Overhead 503 Direct-Material Price Variance 505 Direct-Material Quantity Variance 507 Direct-Labor Rate Variance 509 Direct-Labor Efficiency Variance 511 VOH Spending Variance 512 VOH Efficiency Variance 514 FOH Budget Variance 515 FOH Volume Variance 601 Selling Expenses 701 Administrative Expenses 810 Income Tax Expense 901 Income Summary SUMMARY ACCOUNTS The flexible budget for the South Yuba Milling Company was prepared on the basis of the company s production history of completed units and direct-labor hours. The flexible budget is on the following page. Page 3
Flexible Overhead Budget Direct-Labor Hours Normal Capacity 5,000 6,000 7,000 Budgeted Costs Variable Costs: Indirect material $6,000 $7,200 $8,400 Indirect labor 8,000 9,600 11,200 Utilities 2,000 2,400 2,800 Miscellaneous factory expenses 4,000 4,800 5,600 Total Variable Costs $20,000 $24,000 $28,000 Fixed Costs: Indirect labor $19,000 $19,000 $19,000 Depreciation 12,000 12,000 12,000 Insurance 6,000 6,000 6,000 Property Taxes 8,000 8,000 8,000 Total Fixed Costs $45,000 $45,000 $45,000 Total Overhead Costs $65,000 $69,000 $73,000 Established Standards Cost Item Price per Unit or Rate per Unit Quantity Required per Unit of Finished Product Direct Material $2.00 per unit 2 units Direct Labor $15.00 per hour 2 hours Fixed overhead is budgeted at $45,000 at the normal or expected level of 6000 direct-labor hours (or 3,000 units). The following formulas for variances are applied: Direct-material price variance is computed at the time of purchase. It is the difference between the actual price (AP) and the standard price (SP) of the per unit price of direct material multiplied times the actual quantity (AQ) of material purchased. AQ(AP SP) = Direct-Material Price Variance Direct-material quantity variance is computed at the time of issue to production. It is the difference between the actual quantity used (AQ) and the standard quantity allowed (SQ) multiplied times the standard price (SP) per unit. SP(AQ SQ) = Direct-Material Quantity Variance. Page 4
Direct-labor rate variance is computed at the time the direct-labor payroll is recorded. It is the difference between the actual rate (AR) and the standard rate (SR) per direct-labor hour multiplied times the actual hours (AH) used. AH(AR SR) = Direct-Labor Rate Variance Direct-labor efficiency variance is computed at the time the direct-labor payroll is recorded. It is the difference between the actual hours used (AH) and the standard hours allowed (SH) multiplied times the standard rate per direct-labor hour (SR). SR(AH SH) = Direct-Labor Efficiency Variance Variable-overhead spending variance is computed when the variable manufacturing overhead is applied to the work in process. It the difference between the actual variable overhead rate (AVR) and the standard variable overhead rate (SVR) multiplied times the actual hours of direct labor (AH). AH(AVR SVR) = Variable-Overhead Spending Variance. Variable-overhead efficiency variance is computed when the variable manufacturing overhead is applied to the work in process. It the difference between the actual direct-labor hours (AH) and the standard hours allowed (SH) multiplied times the standard variable cost (SVR) per direct-labor hour. SVR(AH SH) = Variable-Overhead Efficiency Variance Fixed-overhead budget variance is computed when the fixed manufacturing overhead is applied to the work in process. It is the difference between the actual fixed overhead and the budgeted fixed overhead measured at normal or expected capacity. Actual Fixed Overhead Budgeted Fixed Overhead = Fixed-Overhead Budget Variance Fixed-overhead volume variance is computed when the fixed manufacturing overhead is applied to the work in process. It the difference between the budgeted fixed overhead and the applied fixed overhead. The applied fixed overhead is the predetermined fixed overhead rate multiplied times the standard hours allowed. The applied fixed overhead rate is determined by dividing the budgeted fixed costs by the planned (normal or expected) direct labor hours. Budgeted Fixed Overhead Applied Fixed Overhead = Fixed-Overhead Volume Variance The direct-material variances, the direct-labor variances, and the variable-overhead variance are favorable when the actual price, actual hours, or actual rates are less than the standards price, hours, or rates. The direct-material variances, the direct-labor variances, and the variableoverhead variance are unfavorable when the actual price, actual hours, or actual rates exceed the standards price, hours, or rates. All of the overhead variances are closed to the Cost of Goods Sold at the end of the accounting period. Page 5
Log on to Work4Me II and from the Problems Menu Bar select Problem 9: Flexible Budgeting and Overhead. Click on Journals/Ledger/Statement and select General Ledger. Print the beginning Trial Balance. Click on Data Entry and record the following transactions: ************************* RECORD THE MONTHLY TRANSACTIONS In the Date column, enter each transaction as TRAN. Transaction 01: Purchase raw materials Five thousand units of raw material were purchased for $9,750. Record the purchase of the raw materials and the direct materials price variance. Invoice Number: PURRM Transaction 02: Transfer raw materials to a production department Record the transfer of 5,300 units of raw materials to work in process. The production department completed 2,600 units of finished goods with the 5,300 units of raw materials. Record the transfer of raw materials to work in process and the material quantity variance. Invoice Number: TRNDM. Transaction 03: Accrue labor cost Two thousand six hundred (2,600) units were completed. Labor cost was $80,000 for the 5,000 hours of direct labor at $16 per direct-labor hour. Record the payroll for the time period and the labor rate variance and labor efficiency variance. Invoice Number: ACLAB. Transaction 04: Record the payment of the labor payable Record the payment of the payroll liability with check 10001. Invoice Number: PAYRL. Page 6
Transactions continued Student Analysis Transaction 05: Record the Manufacturing Overhead for the month In order to reduce the number of journal entries, we will assume all manufacturing overhead costs are paid with cash. Actual fixed overhead costs of $44,800 are included. Record the manufacturing overhead costs of $66,000 with check 10002. Invoice Number: MNOVH. Transaction 06: Record the application of variable manufacturing overhead Review the Standards to calculate the amount of manufacturing overhead applied to the Work-in-Process Inventory account for 2,600 units of product. Then compute the budget (efficiency) variance and the spending variance for variable overhead. Record the application of manufacturing overhead and the variances with a compound entry. Invoice Number: APMOH. Transaction 07: Record the application of Fixed manufacturing overhead Review the Standards to calculate the amount of manufacturing overhead applied to the Work-in-Process Inventory account for 2,600 units of product. Then compute the budget variance and the volume variance for fixed overhead. Record the application of manufacturing overhead and the variances in a compound entry. Invoice Number: APMOH. Transaction 08: Record the transfer of finished goods Record the transfer of the 2,600 units from Work-in-Process Inventory to Finished-Goods Inventory. There is no ending work in process at the end of the accounting period. Invoice Number: TRNFG. Page 7
Transactions continued Student Analysis Transactions 09 and 10: Record the sale of finished goods Record the cash sale of the 3,600 units at $100 per unit. This required two entries. At the invoice prompt type Sales. Tran. 09: Record the cash sales. Invoice Number: ALES. Tran. 10: Record the cost of goods sold and decrease in finished goods. All of the finished goods on hand ($210,200) were sold in Entry 1 above. Invoice Number: CGSM1. Transaction 11: Record the selling and administrative expenses Record as a compound entry the $50,000 of selling expense and $20,000 of administrative expenses. Check Number: 10003. Invoice Number: RCEXP. ************************ Check Point: Now that you have completed entering the first eleven transactions, it is time to check the accuracy of your work. A. Move the pointer to Journals/Ledgers/Statements, select General Ledger, then Print the Trial Balance. B. Move the pointer to Check Figures and click. C. Print the Check Figures for Problem 8 Flexible Budgeting and Overhead Transaction: 11. If your account balances are in agreement, then continue. If your account balances are not in agreement, then print a copy of your General Journal and compare your entries with the data entry information and make appropriate correcting entries. Page 8
Transactions continued Student Analysis Transaction 12, 13, 14, 15: Close the variance accounts 12. Close the material variance accounts into the Cost of Goods Sold account, with a compound journal entry. Invoice Number: DMVAR. 13. Close the direct-labor variance accounts into the Cost of Goods Sold account, with a compound journal entry. Invoice Number: DLVAR. 14. Close the variable overhead variance accounts, (Efficiency and Spending) into the Cost of Goods Sold account, with a compound journal entry. Invoice Number: OHVAR. 15. Close the fixed overhead variance accounts (Budget and Volume) into the Cost of Goods Sold account, with a compound journal entry. Invoice Number: OHVAR. ************************ This Concludes the Transactions Print a Trial Balance The Correct Trial Balance Total is $920,750.00 Complete the Examination on Flexible Budgeting and Overhead. ************************ Page 9
MANAGERIAL WORK4ME NAME PROBLEM 9 CLASS DAY AND TIME DATE FLEXIBLE BUDGETING AND OVERHEAD 1. What is the balance of Cost of Goods Sold? $ 2. What is the operating income for the accounting period? $ 3. What is the percentage of operating income to sales? % 4. What is the standard cost per direct-labor hour for fixed overhead? $ 5. What was the standard overhead manufacturing cost per hour? $ 6. What is the total of the unfavorable variances? $ 7. What is the total of the favorable variances? $ 8. What are the total budgeted overhead costs at the normal production level of 6,000 units? 9. If the actual variable overhead costs had been $21,420 at 5,100 direct-labor hours to produce the 2,600 units, what would have been the variable-overhead spending variance? 10. If the actual fixed overhead costs had been $47,000, and 5,300 direct-labor hours were used to produce the 2,600 units, what would have been the volume variance? $ $ $ Page 10