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Homework answers / question archive / Trueform Products Inc
Trueform Products Inc., a U.S. company, produces a broad line of sports equipment and uses a standard costing system for control purposes. Last year, the company produced 8,000 varsity footballs. The standard costs associated with this football, along with the actual costs incurred last year, follow (per football): Standard Cost Actual Cost Direct materials: Standard: 3.7 feet at $5.00 per foot $18.50 Actual: 4.0 feet at $4.80 per foot $19.20 Direct labour: Standard: 0.9 hour at $7.50 per hour 6.75 Actual: 0.8 hour at $8 per hour 6.40 Variable manufacturing overhead: Standard: 0.9 hour at $2.50 per hour 2.25 Actual: 0.8 hour at $2.75 per hour 2.20 Total cost per football $27.50 $27.80 The president was elated when he saw that actual costs exceeded standard costs by only $0.30 per football. He stated, “I was afraid that our unit cost might get out of hand when we gave out those raises last year in order to stimulate output. But it's obvious our costs are well under control." There was no inventory of materials on hand to start the year. During the year, 32,000 feet of materials were purchased and used in production Required: 1. For direct materials: a. Compute the price and quantity variances for the year. b. Prepare journal entries to record all activity relating to direct materials for the year. 2. For direct labour: a. Compute the rate and efficiency variances. b. Prepare a journal entry to record the incurrence of direct labour cost for the year. 3. Compute the variable overhead spending and efficiency variances. 4. Was the president correct in his statement that “our costs are well under control"? Explain. 5. State possible causes of each variance that you have computed.
1. Direct Material
Direct Material Price Variance = (Standard Price - Actual Price) Actual Quantity
= ( 5.00 - 4.80) 4.00 ft
= $ 0.80 per football (favorable)
Direct Material Quantity Variance = (Standard Quantity - Actual Quantity) Standard Price
=(3.70 - 4.00) $ 5.00
= - $ 1.50 per football (unfavorable)
Journal Entries in Books
For Accounts purposes
Purchases A/c Dr. $ 153,600
To Cash A/c Cr. $ 153,600
(Being direct material purchased during the year)
Entries in Cost Ledger
Work in Process A/c Dr. $153,600
To Direct Material A/c Cr. $ 153,600
2. Direct Labour
Efficiency Variance = (Standard Hours - Actual Hours) Standard Rate
= (0.90 - 0.80) $ 7.50
= $ 0.75 per football (favorable)
Rate Variance = ( Actual Rate - Standard Rate) Actual Hours
=( 8.00 - 7.50) 0.80
= - $ 0.40 per football ( unfavorable)
Journal Entry
Direct Labour Cost A/c Dr. $51,200
To Cash A/c Cr. $ 51,200
(Being labour cost incurred during the year)
Entries in Cost Ledger
Work in Process A/c Dr. $51,200
To Direct Material A/c Cr. $ 51,200
3. Variable Overhead Variance
Spending Variance = ( Actual Rate - Standard Rate) Actual Hours
= ($ 2.75 - $ 2.50) 0.80
= $ 0.20 per football (unfavorable)
Efficiency Variance = ( Standard Hours - Actual Hours) Standard Rate
= ( 0.9 -0.8) $ 2.5
= $ 0.25 per football favorable
4. The president is correct in his statement as total costs exceeded by$ 0.30 per football.
Total Variance = Direct Material Variance + Direct Labor Variance + Variable Overhead Variance
= ( 0.80 - 1.50) + ( 0.75 - 0.40) + (- 0.20 + 0.25) per football
= - $ 0.30 per football ( unfavorable)
5. Reason for variance
a. Direct Material Price Variance is favourable as the actual price is less as compared to the standard price per foot of direct material
b. Direct Material Quantity Variance as actual quantity is more as compared to the standard quantity used for each football.
c. Direct Labour Efficiency Variance is favourable as the actual hours per football are less as compared to the standard hours per football.
d. Direct Labour Rate Variance is unfavourable as the actual rate is more as compared to the standard rate per hour.
e. Variable Overhead Spending Variance is unfavourable as the actual rate is more as compared to the standard rate per hour.
f. Variable Overhead Efficiency Variance is favourable as the actual hours per football are less as compared to the standard hours per football.