Question

Smith Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system. Smith allocates overhead based on yards of direct materials. The company's performance report includes the following selected data: (Click the icon to view the selected data.) Read the requirements Requirement 1. Prepare a flexible budget based on the actual number of recliners sold. (Round budget amounts per unit to the nearest cent.) 980 Smith Recliners Flexible Budget Budget Amounts per Unit Actual Units (Recliners) Sales Revenue 499800|| Variable Manufacturing Costs: Direct Materials 54058.40 Direct Labor 87360 Variable Overhead 31500 Fixed Manufacturing Costs: Fixed Overhead 000 Total Cost of Goods Sold Gross Profit Requirement 2. Compute the cost variance and the efficiency variance for direct materials and for direct labor. For manufacturing overhead, compute the variable overhead cost, variable overhead efficiency, fixed overhead cost, and fixed overhead volume variances. Round to the nearest dollar. Begin with the cost variances. Select the required formulas, compute the cost variances for direct materials and direct labor, and identify whether each variance is favorable (F) or unfavorable (U). (Round your answers to the nearest whole dollar. Abbreviations used: AC = actual cost; AQ = actual quantity, FOH = fixed overhead; SC = standard cost; SQ = standard quantity.)

Answer 1

1.

Smith Recliners
Flexible Budget
	Budget Amounts per Unit
Actual Units (Recliners)		980
Sales revenue	510.00	499800
Variable manufacturing costs
Direct materials	52.80	51744
Direct labor	91.00	89180
Variable overhead	30.00	29400
Fixed manufacturing costs
Fixed overhead		60000
Total cost of goods sold		230324
Gross profit		269476

2.

		Formula		Variance
Direct materials efficiency variance	=	(AQ - SQ) x SC	=	2314	U
Direct labor efficiency variance	=	(AQ - SQ) x SC	=	1820	F

Direct materials efficiency variance = (6143 -5880) x $8.80 = $2314.40

Direct labor efficiency variance = (9600 - 9800) x $9.10 = $-1820

		Formula		Variance
VOH cost variance	=	Actual VOH - (SC x AQ)	=	8600	U
VOH efficiency variance	=	(AQ - SQ) x SC	=	1315	U

VOH cost variance = $39315 - ($5.00 x 6143) = $8600

VOH efficiency variance = (6143 - 5880) x $5.00 = $1315

		Formula		Variance
FOH cost variance	=	Actual FOH - Budgeted FOH	=	2000	U
FOH volume variance	=	Budgeted FOH - Allocated FOH	=	1200	U

FOH cost variance = $62000 - $60000 = $2000

FOH volume variance = $60000 - $58800 = $1200

3. The variances computed in Requirement 2 suggest that the managers have done a poor job controlling materials and labor costs. The favorable direct materials cost variance and direct labor efficiency variance help offset the unfavorable direct labor cost variance and direct materials efficiency variance. Managers have done a poor job controlling overhead costs as evidenced by the fact that all of the overhead variances are unfavorable.