Question

Wallis Company manufactures only one product and uses a standard cost system. The company uses a predetermined plantwide overhead rate that relies on direct labor-hours as the allocation base. All of the company's manufacturing overhead costs are fixed—it does not incur any variable manufacturing overhead costs. The predetermined overhead rate is based on a cost formula that estimated $2,886,000 of fixed manufacturing overhead for an estimated allocation base of 288,600 direct labor-hours. Wallis does not maintain any beginning or ending work in process inventory.

The company’s beginning balance sheet is as follows:

Wallis Company
Balance Sheet
1/1/XX
(dollars in thousands)
Assets
Cash	$	760
Raw materials inventory		210
Finished goods inventory		330
Property, plant, and equipment, net		9,100
Total assets	$	10,400
Liabilities and Equity
Retained earnings	$	10,400
Total liabilities and equity	$	10,400

The company’s standard cost card for its only product is as follows:

Inputs	(1) Standard Quantity or Hours	(2) Standard Price or Rate			Standard Cost (1) × (2)
Direct materials	2 pounds	$	31.20	per pound	$	62.40
Direct labor	3.00 hours	$	15.00	per hour		45.00
Fixed manufacturing overhead	3.00 hours	$	10.00	per hour		30.00
Total standard cost per unit					$	137.40

During the year Wallis completed the following transactions:

1. Purchased (with cash) 233,000 pounds of raw material at a price of $30.10 per pound.
2. Added 216,500 pounds of raw material to work in process to produce 95,600 units.
3. Assigned direct labor costs to work in process. The direct laborers (who were paid in cash) worked 246,200 hours at an average cost of $16.00 per hour to manufacture 95,600 units.
4. Applied fixed overhead to work in process inventory using the predetermined overhead rate multiplied by the number of direct labor-hours allowed to manufacture 95,600 units. Actual fixed overhead costs for the year were $2,743,000. Of this total, $1,346,000 related to items such as insurance, utilities, and salaried indirect laborers that were all paid in cash and $1,397,000 related to depreciation of equipment.
5. Transferred 95,600 units from work in process to finished goods.
6. Sold (for cash) 92,600 units to customers at a price of $170 per unit.
7. Transferred the standard cost associated with the 92,600 units sold from finished goods to cost of goods sold.
8. Paid $2,123,000 of selling and administrative expenses.
9. Closed all standard cost variances to cost of goods sold.

Required:

1. Compute all direct materials, direct labor, and fixed overhead variances for the year.

2. Record transactions a through i for Wallis Company.

3. Compute the ending balances for Wallis Company’s balance sheet.

4. Prepare Wallis Company’s income statement for the year.

Answer 1

ANSWER

Material Variance				Labor Variance
Standard Material Price		$             31.20	SP	Standard Hour Rate		$          15.00
Standard Quantity	95600*2	191200	SQ	Standard Hour	95600*3	286800
Actual Quantity Purchased		233000	AQ	Actual Hours		246200
Actual Quantity used		216500	AQ			246200
Actual Matrial Price		$             30.10	AP	Actual Hour Rate		$          16.00
Material Price Variance	AQ(AP-SP)			Labor Rate Variance	AH(AR-SR)
	$                      -256,300	F			$                     246,200	U
Material Quantity Variance	SP(AQ-SQ)			Labor Efficiency Variance	SR(AH-SH)
	$                       789,360	U			$                    -609,000	F
Actual Cost Incurred		$      2,743,000	a
Static Budget		$      2,886,000	b
Budgeted Input For Actual Output*Budgeted Rate	95600*3*10	$      2,868,000	c
Spending Variance	a-b	$         143,000	F
Production Volume Variance	b-c	$          -18,000	F
Account	Debit	Credit
Raw Material Inventory	$                    7,013,300
Cash		$      7,013,300
Work in Process Inventory	$                    6,516,650
Raw Material Inventory		$      6,516,650
Work in Process Inventory	$                    3,939,200
Wages		$      3,939,200
Work in Process Inventory	$                    2,868,000
Factory Overhead (95600*3*10)		$      2,868,000
Factory Overhead	$                    2,743,000
Cash		$      1,346,000
Accumulated Depreciation		$      1,397,000
Finished Goods Inventory	$                  13,323,850
Work in Process Inventory		$    13,323,850
Cash	$                  15,742,000
Sales Revenue		$    15,742,000
Cost of Goods Sold (13323850/95600*92600)	$                  12,905,738
Finished Goods Inventory		$    12,905,738
Selling and Administrative Expense	$                    2,123,000
Cash		$      2,123,000
Cost of Goods Sold:
Beginning, Finished Goods		$         330,000
Cost of Goods Manufactured:
Direct Material, Beginning	$                       210,000
Add: Purchase	$                    7,013,300
Less: Direct Material, Ending	$                      -706,650
Direct Material Cost	$                    6,516,650
Direct Labor	$                    3,939,200
Overhead-Applied	$                    2,868,000
Cost of Goods Manufactured:		$    13,323,850
Cost of Goods Available		$    13,653,850
Less: Finished Goods, Ending		$         748,112
Cost of Goods Sold		$    12,905,738
Income Statement:
Sales		$    15,742,000
Less: Cost of Goods Sold		$    12,905,738
Add: Overapplied Overhead		$         125,000
Gross Margin		$      2,961,262
Less: Selling and Admin		$      2,123,000
Net Income		$         838,262

Raw Material Inventory
Debit		Credit
Beginning	$     210,000	b	$ 6,516,650
a	$ 7,013,300
Ending	$     706,650
Finished Goods Inventory
Debit		Credit
Beginning	$     330,000	h	$12,905,738
f	$13,323,850
Ending	$     748,112
Cash
Debit		Credit
Beginning	$     760,000	a	$ 7,013,300
g	$15,742,000	e	$ 1,346,000
		i	$ 2,123,000
Ending	$ 6,019,700
Work in process Inventory
Debit		Credit
b	$ 6,516,650	f	$13,323,850
c	$ 3,939,200
d	$ 2,868,000
Factory Overhead
Debit		Credit
e	$ 1,346,000	d	$ 2,868,000
e	$ 1,397,000
		Overapplied	$     125,000

		Cash	RM	WIP	Finished Goods	PPE	=	MPV	MQV	LRV	LEV	FOB	FOV	Retained Earning
1/1		$                       760,000	$         210,000		$                        330,000	$                  9,100,000								$        10,400,000
a		$                   -7,013,300	$      7,013,300					$-256,300
b			$    -6,516,650	$    6,516,650					$-789,360
c				$    3,939,200						$    -246,200	$   -609,000			$          3,939,200
d				$    2,868,000										$          2,868,000
e		$                   -1,346,000				$                 -1,397,000						$     143,000	$ 18,000	$         -2,743,000
f				$-13,323,850	$                   13,323,850									$                        -
g		$                  15,742,000												$        15,742,000
h					$                  -12,905,738									$      -12,905,738
i		$                   -2,123,000												$         -2,123,000
	Variance Adjustment to COGS							$ 256,300	$ 789,360	$     246,200	$     609,000	$    -143,000	$ -18,000
		$                    6,019,700	$         706,650	$                 -	$                        748,112	$                  7,703,000		$            -	$            -	$                -	$               -	$                -	$          -	$        15,177,462

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