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Question: Edney Company employs a standard cost system


Edney Company employs a standard cost system for product costing. The per-unit standard cost of its product is:

Raw materials ……………………………………………………………………..…. $14.50
Direct labor (2 direct labor hours × $8.00 per hour) …………………… 16.00
Manufacturing overhead (2 direct labor hours × $11.00 per hour) .. 22.00
Total standard cost per unit …………………………………………………….. $52.50

The manufacturing overhead rate is based on a normal capacity level of 600,000 direct labor hours. (Normal capacity is defined as the level of capacity needed to satisfy average customer demand over a period of two to four years. Operationally, this level of capacity would take into consideration sales trends and both seasonal and cyclical factors affecting demand.) The firm has the following annual manufacturing overhead budget:

Variable ………………………………….. $3,600,000
Fixed ……………………………………….. 3,000,000
………………………………………………. $6,600,000

Edney incurred $433,350 in direct labor cost for 53,500 direct labor hours to manufacture 26,000
units in November. Other costs incurred in November include $260,000 for fixed manufacturing
overhead and $315,000 for variable manufacturing overhead.

Required:
1. Determine each of the following for November. [Note: Round each overhead variance to nearest whole dollar, and indicate whether each variance is favorable (F) or unfavorable (U).]
a. The variable overhead spending variance.
b. The variable overhead efficiency variance.
c. The fixed overhead spending (budget) variance.
d. The fixed overhead production volume variance.
e. The total amount of under- or overapplied manufacturing overhead (i.e., the total manufacturing overhead cost variance for the period).
2. Provide the following four journal entries:
(a) to record actual variable overhead costs,
(b) to record actual fixed overhead costs,
(c) to record standard overhead costs applied to production, and
(d) to record all four overhead cost variances. The company uses a single account, Factory Overhead, to record all overhead costs. Assume that the actual variable manufacturing overhead consists of utilities payable of $165,000, indirect materials of $100,000 (all materials, direct and indirect, are recorded in a single account, Materials Inventory), and $50,000 depreciation on factory equipment (determined under the units-of-production method). Assume that the fixed manufacturing overhead consists of accrued (i.e, unpaid) salaries of $60,000 and factory depreciation of $200,000. All unpaid salaries should be recorded in a single account, Accrued Payroll.
3. Give the appropriate journal entry to close all manufacturing overhead variances to the cost of
goods sold (COGS) account. (Assume the cost variances you calculated above are for the year, not
the month.)
4. How, if at all, would the provisions of GAAP regarding inventory costing (viz., FASB ASC 330-10-30, previously SFAS No. 151— available at www.fasb.org) bear upon the end-of-period variance disposition question?
5. Explain how reported earnings under absorption costing can be managed by the method used to dispose of (fixed) overhead cost variances at the end of the period.


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