55) The Saskatchewan division of a Canadian farm machinery company uses a standard cost system for its machine-based production of grain drying equipment. Data regarding production for April are as follows:
Variable manufacturing overhead costs incurred$ 549,600
Variable manufacturing overhead costs allocation rate$750 per machine hour
Fixed manufacturing overhead costs incurred$86,500
Fixed manufacturing overhead budgeted$90,000
Denominator level machine hours800hours
Standard machine hours allowed per unit of output40hours
Actual machine-hours used820hours
Ending work-in-process inventorynil
1.Prepare the necessary journal entries to account for the fixed manufacturing overhead incurred and allocated to production.
2.Prepare the journal entry to close the fixed overhead variance accounts assuming that the fluctuation in denominator level is considered to be normal.
56) Mostly Miniatures has just implemented a new cost accounting system that provides two variances for fixed manufacturing overhead. While the company's managers are familiar with the concept of static-budget variance, they are unclear as to how to interpret the production-volume overhead variances. Currently the company has a production capacity of 54,000 miniatures a month although it generally produces only 46,000 cases. However, in any given month the actual production is probably something other than 46,000.
a.Does the production-volume overhead variance measure the difference between the 54,000 and 46,000, or the difference between the 46,000 and the actual monthly production? Explain.
b.What advice can you provide the managers that will help them interpret the production-volume overhead variances?
a.It is the difference between the 46,000 and the actual production level for the period. The difference between the 54,000 and the 46,000 is the unused capacity that was planned for the period. The difference between the 46,000 and the actual level was not planned.
b.When actual outputs are less than the denominator level, the production-volume variance is unfavourable. This is opposite the label given other variances that have a favourable label when costs are less than the budgeted amount; therefore, caution is needed.
57) What are the arguments for prorating a production-volume variance that has been deemed to be material among work-in-process, finished goods, and cost of goods sold, as opposed to writing it all off to cost of goods sold?
58) Explain two concerns when interpreting the production-volume variance as a measure of the economic cost of unused capacity.