Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 6

Four-Variance Analysis; Journal Entries Edney Company employs a standard cost system for product costing. The standard cost of its product is:

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:

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:
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.
2. Provide appropriate journal entries to record actual overhead costs, standard overhead costs applied to production, and all four overhead variances.
3. Give the appropriate journal entry to close all overhead variances to the cost of goods sold (CGS) account. (Assume the variances you calculated above are for the year, not the month.)
4. How, if at all, would the provisions of GAAP regarding inventory costing (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.
(CMA Adapted)