Accounting 225 Quiz Section #12

Midterm 2 Review Class Exercises Solution

1. Data concerning Sonderegger Company's operations last year appear below:

a) Prepare an income statement for the year using absorption costing.

$6 = $2.00 + $1.00 + $1.00 + $140,000/70,000

**$150,000 + 60,000 units x $1.50 per unit

b) Prepare a contribution format income statement for the year using variable costing.

c) Prepare a report reconciling the difference in net operating income between absorption and
variable costing for the year.

Accounting 225 Quiz Section #12

Midterm 2 Review Class Exercises Solution
2. A sales budget is given below for one of the products manufactured by the Key Co.:

The inventory of finished goods at the end of each month must equal 20% of the next month's
sales. On December 31, the finished goods inventory totaled 4,000 units.
Each unit of product requires three specialized electrical switches. Since the production of these
specialized switches by Key's suppliers is sometimes irregular, the company has a policy of
maintaining an ending inventory at the end of each month equal to 30% of the next month's
production needs. This requirement had been met on January 1 of the current year.
Prepare a budget showing the quantity of switches to be purchased each month for January,
February, and March and in total for the quarter.
The company's production budget is as follows:

The materials purchases budget (based on the above production budget) would be as
follows:

*69,000 x 0.30 =20,700

**38,000 x 3 = 114,000; 114,000 x 0.30 = 34,200

Accounting 225 Quiz Section #12

Midterm 2 Review Class Exercises Solution
3. Lido Company's standard and actual costs per unit for the most recent period, during which
400 units were actually produced, are given below:

From the foregoing information, compute the following variances. Show whether the variance is
favorable (F) or unfavorable (U):
a) & b)
Standard Quantity Allowed for
Actual Quantity
Actual Output,
of Input,
at Standard Price
at Standard Price
(SQ SP)
(AQ SP)
400 2 x $1.50
400 2.1 x $1.50
= $1,200
= $1,260
Materials Quantity Variance
= $60 U

Actual Quantity
of Input,
at Actual Price
(AQ AP)
400 $3.36
= $1,344

400 2.1 x $1.50

= $1,260
Materials Price Variance
= $84 U
Alternate Solution:
a) Materials price variance = AQ(AP - SP) = (2.1 x 400) x ($1.60 - $1.50) = $84 U
Journal Entry:
Raw Materials
1260
DM Price Variance
84
Accounts Payable
T-Accounts:
RM Inventory
1,260
400*2.1*1.50 2nd prong

1344

Accounts Payable
1,344
Actual

DM Price Variance
84
Difference

Accounting 225 Quiz Section #12

Midterm 2 Review Class Exercises Solution
b) Materials quantity variance = SP(AQ - SQ) = $1.50(2.1 x 400 - 2.0 x 400) = $60 U
Journal Entry:
WIP
1200
DM Quantity Variance
Raw Materials

60
1260

T-Accounts:
RM Inventory
1,260
2nd prong

400*2.1*1.5

WIP
1,200
400*2*1.5

DM Quantity Variance
60

Flex
budget

Difference

c)
Standard Hours Allowed
for Actual Output,
Actual Hours of Input,
Actual Hours of Input,
at Standard Rate
at Standard Rate
at Actual Rate
(SH SR)
(AH SR)
(AH AR)
400 hours 1.5 x $6/hour
400 x 1.4 x $6/hour
400 x 1.4 x $6.5/hour
= $3,600
= $3,360
= $3,640
Labor efficiency variance
Labor rate variance
= $240 F
= $280 U
Spending variance = $40 U
Alternate Solution:
Direct labor rate variance = AH(AR - SR) = (1.4 x 400) x ($6.50 - $6.00) = $280 U
Direct labor efficiency variance = SR(AH - SH) = $6.00(1.4 x 400 - 1.5 x 400) = $240 F
Journal Entry:
WIP
3600
DL Rate Variance
280
Wages Payable
DL Efficiency Variance

3640
240

T-Accounts:
WIP
3,600
400*1.5*6 2nd prong

Wages Payable
3,640
Actual

DL Rate Variance

DL Efficiency
Variance

280

240

Difference

Difference

Accounting 225 Quiz Section #12

Midterm 2 Review Class Exercises Solution
d)
Standard Hours Allowed
for Actual Output,
Actual Hours of Input,
Actual Hours of Input,
at Standard Rate
at Standard Rate
at Actual Rate
(SH SR)
(AH SR)
(AH AR)
400 hours 1.5 x $3.40/hour
400 hours 1.4 x $3.40/hour
= $2,040
= $1,904
$1,736
Variable overhead efficiency
Variable overhead rate
variance
variance
= $136 F
= $168 F
Spending variance = $304 F (Over Applied)

Alternate Solution:
Variable overhead rate variance = AH(AR - SR) = (1.4 x 400) x ($3.10 - $3.40) = $168 F
Variable overhead efficiency variance = SR(AH - SH) = $3.40(1.4 x 400 - 1.5 x 400) = $136 F
Total Spending Variance: $304 Favorable.
VMOH is over-applied by $304.
Journal Entry:
VMOH Control
Accounts Payable
WIP
2040
VMOH Control
VMOH Control
VMOH Rate Variance
VMOH Efficiency Variance

1736
1736
2040
304
136
168

T-Accounts:
WIP
2,040

VMOH Control
1736
2,040
Overapplied
304
Actual
Applied

400*1.5*3.40

VMOH Rate Variance

168
Difference

VMOH Efficiency
Variance
136
Difference

Accounting 225 Quiz Section #12

Midterm 2 Review Class Exercises Solution

e)

Close all the variances to Cost of Goods Sold.

COGS
DM Quantity
60
240
Variance
DL Rate Variance
280
168 VMOH Rate Variance
DL Rate Variance
VMOH Efficiency
84
DM Price Variance
136 Variance
120

Accounting 225 Quiz Section #12

Midterm 2 Review Class Exercises Solution
4. The selected information presented in the table below relates to Franklin Corporations output
of 1,800 units of its single product during the month of April, 2012. Note that Franklin applies
manufacturing overhead on the basis of standard direct-labor hours (SDLH).
Standard quantity of direct materials per unit of output.
2.5 lb.
Standard price for materials.
$1.60 per lb.
Standard labor hours (SDLH) allowed per unit of output.
1.25 hours
Standard variable manufacturing overhead application rate per SDLH $3.00
Total variable manufacturing overhead incurred
$5,800
Direct materials on hand, April 1
400 lb.
Cost of 5,000 lb. of materials purchased during April.
$7,400
Direct materials on hand, April 30.
350 lb.
a) The materials price variance for April was $600F
AQ purchased x S price
AQ purchased at A price
5,000 gls. X $1.60
$8,000
$7,400
Materials price variance
$600 F
b) The materials quantity variance for April was $880U
400 lb beg. Inventory + 5,000 lb purchased minus 350 end. Inventory = 5,050 lb used
Sq used x S price
(1,800 units produced x 2.5 lb/unit) X $1.60
$7,200

Aq used at S price
5,050 lb x $1.60
$8,080

Materials quantity variance

$880 U
c) Was variable manufacturing overhead under- or over-applied relative to actual VMOH
incurred for the month? Circle one response and indicate the amount below. [4]
VMOH applied: Sq DL hrs x Sp: (1,800 units x 1.25 DLH) x $3 application rate = $6,750
Variable overhead cost incurred (given), $5,800
$6,750 applied versus $5,800 incurred = $950 over-applied. (Note that this is an overall VMOH
favorable variance.)