The Minot plant of Rao’s Small Motor Division produces a major subassembly for motorcycles. The plant uses a standard costing system for production costing and control. The standard cost sheet for the subassembly follows:
Direct materials (7.0 lbs. @ $6.00) $42.00
Direct labor (2 hrs. @ $12.00) 24.00
Variable overhead (2 hrs. @ $10.00) 20.00
Fixed overhead (2 hrs. @ $6.00) 12.00
Standard unit cost $98.00
During the year, the Minot plant had the following actual production activity:
a. Production of subassemblies totaled 70,000 units.
b. A total of 465,000 pounds of materials was purchased at $5.80 per pound.
c. There were 26,400 pounds of materials in beginning inventory (carried at $6 per pound). There was no ending inventory.
d. The company used 150,000 direct labor hours at a total cost of $1,950,000.
e. Actual fixed overhead totaled $913,000.
f. Actual variable overhead totaled $1,470,000.
The Minot plant’s practical activity is 75,000 units per year. Standard overhead rates are computed based on practical activity measured in standard direct labor hours.
1. Compute the materials price and usage variances. Of the two materials vari- ances, which is viewed as the most controllable? To whom would you assign responsibility for the usage variance in this case? Explain.
2. Compute the labor rate and efficiency variances. Who is usually responsible for the labor efficiency variance? What are some possible causes for this variance?
3. Compute the variable overhead spending and efficiency variances.
4. Compute the fixed overhead spending and volume variances. Interpret the vol- ume variance. What can be done to reduce this variance?
5. Assume that the purchasing agent for the small motors plant purchased a lower- quality material from a new supplier. Would you recommend that the plant continue to use this cheaper material? If so, what standards would likely need revision to reflect this decision? Assume that the end product’s quality is not sig- nificantly affected.
6. Prepare all possible journal entries.