South Central College Use of the Direct Labor Efficiency Variance Worksheet

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Mini-Practice Set

Budgeting and Standard Costs

In this project you will apply the techniques and principles of budgeting and standard costs to the operations of Speedway Toys, Inc. You will prepare budgets for the year ended December 31, 20XX, determine standards costs per hour and per unit of product, and compute variances for the month of January 20XX.

Company’s Operations

Speedway Toys, Inc., manufactures a battery-powered toy car that is sold in toy stores and department stores. In the firm’s manufacturing process, highly skilled employees operate molding machines that form semi-liquid plastic into car bodies. Assembly personnel insert a battery driven motor assembly, which the firm purchases from a subcontractor, into the molded car body. Then the assembly personnel add wheels and axles (also purchased from a subcontract) and decorative trim to complete the car.

Preparation Budgets

SALES BUDGET

The sales manager and her staff have analyzed sales records and other data and forecast that 61,000 cars will be sold in 20XX. Standard costs are to be based on this volume of production, which should require 30,000 direct labor hours.

PRODUCTION BUDGET

Speedway Toys, Inc., expects to begin 20XX with an inventory of 7,000 completed toy cars. The company would like to reduce its finished goods inventory of toy cars at the end of 20XX by 1,000 cars to 6,000 cars.

STANDARDS FOR DIRECT MATERIALS AND DIRECT LABOR

Speedway Toys, Inc., has established the following standards for direct materials and direct labor, which should be attainable under normal circumstances. Later you will be instructed to compute the standard cost per hour of direct labor and per unit of product. Data related to direct materials follow:

Material Quantity Cost per Unit Cost per Car

Plastic 1.5 lb per car $3.40 per lb $5.10

Motor assembly 1 motor per car $6.50 per motor $6.50

Wheels and axles 1 set per car $0.40 per set $0.40

Total $12.00

NOTE: Paint and stickers for decorative trim are considered part of indirect materials.

Data related to direct labor follow:

Job Title Hours per Car Rate per Car Cost per Car

Molders 0.2 $15.00 $3.00

Assemblers 0.3 $18.00 $5.40

Total 0.5 $8.40

MATERIALS BUDGET

Beginning inventories of raw materials on January 1, 20XX, are expected to be as follows:

Material Amount

Plastic 5,500 lb

Motors 4,000 motors

Wheels and axles 2,500 sets

Speedway Toys, Inc., would like to have enough raw materials on hand at the end of the year to equal the following percentages of 20XX budgeted requirements:

Material Percentage of 20XX Budget

Plastic 5%

Motors 10%

Wheels and axles 1%

MANUFACTURING OVERHEAD BUDGET

The following information related to variable and fixed manufacturing overhead costs for 20XX has been assembled. Later you will be directed to complete the manufacturing overhead budget and compute the standard overhead cost per hour and per unit.

SPEEDWAY TOYS, INC.

Analysis of Fixed and Variable Overhead Costs

Year Ended December 31, 20XX

VARIABLE OVERHEAD PER HOUR FIXED OVERHEAD

Controllable Costs

Indirect Materials $0.04 —-

Indirect Labor 2.00 $60,000

Payroll Taxes and Fringe Benefits 2.80 9,000

Utilities 0.32 12,000

Repairs and Miscellaneous 0.34 9,600

Non-controllable Costs

Depreciation —- 42,000

Insurance —- 12,000

Total Manufacturing Overhead $5.50 $144,600

STANDARD COST ACCOUNTING PROCEDURES TO BE COMPLETED

During January 20XX, Speedway Toys, Inc., manufactured 4,800 toy cars. The costs of materials, labor, and overhead were as follows:

Material Amount

Plastic 7,050 lb at $3.60 per lb

Motor 4,975 motors at $6.24 per motor

Wheels and axles 4,880 sets at $.425 per set

Direct Labor Hours Rate

Molders 930 hr $15.20 per hour

Assemblers 1510 hr $18.40 per hour

Overhead Amount

Variable $13,120

Fixed $12,050

You are to prepare the following for the month of January 20XX. For all variances computed, show whether they are favorable or unfavorable.

B-1 Prepare a summary of materials costs.

B-2 Prepare a summary of labor costs.

B-3 Compute the quantity and price variances for each material.

B-4 Compute the efficiency and rate variance for each type of labor.

B-5 Compute the total manufacturing overhead variance. Analyze the total overhead variance, using the three-variance analysis method.

B-6 Prepare entries in general journal form to record each of the following (omit explanations):

a. Charge the raw materials to production and record the materials variances.

b. Charge the labor to production and record the labor variances.

c. Charge the manufacturing overhead to production and record the overhead variances.

d. Transfer the completed units to finished goods.

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