Reference no: EM13876852
Proration of Variances Butrico Manufacturing Corporation uses a standard cost system, records materials price variances when raw materials are purchased, and prorates all variances at year-end. Variances associated with direct materials are prorated based on the balances of direct materials in the appropriate accounts, and variances associated with direct labor and manufacturing overhead are prorated to Finished Goods Inventory and CGS on the basis of the relative direct labor cost in these accounts at year-end.
The following Butrico information is for the year ended December 31:
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Finished goods inventory at 12/31:
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Direct materials
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$87,000
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Direct labor
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130,500
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Applied manufacturing overhead
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104,400
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Raw materials inventory at 12/31
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$65,000
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Cost of goods sold for the year ended 12/31:
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Raw materials inventory at 12/31
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$348,000
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Direct labor
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739,500
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Applied manufacturing overhead
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591,600
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Direct materials price variance (unfavorable)
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10,000
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Direct materials usage variance (favorable)
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15,000
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Direct labor rate variance (unfavorable)
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20,000
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Direct labor efficiency variance (favorable)
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5,000
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Actual manufacturing overhead incurred
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690,000
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The company had no beginning inventories and no ending work-in-process (WIP) inventory. It applies manufacturing overhead at 80 percent of standard direct labor cost.
Required: For (1) through (4), compute:
1. The amount of direct materials price variance to be prorated to finished goods inventory at December 31.
2. The total amount of direct materials cost in finished goods inventory at December 31, after all materials variances have been prorated. (Hint: The correct amount is $85,732.)
3. The total amount of direct labor cost in finished goods inventory at December 31, after all variances have been prorated. (Hint: The correct amount is $132,750.)
4. The total cost of goods sold for the year ended December 31, after all variances have been prorated. (Hint: The correct amount is $1,681,678.)
5. How, if at all, would the provisions of GAAP regarding inventory costing (i.e., FASB ASC 330-10-30, pre- viously SFAS No. 151-available at www.asc.fasb.org) bear upon the end-of-period variance-disposition question?
6. Under absorption costing, explain how reported earnings can be managed by the method used to dispose of (fixed) overhead cost variances at the end of the period.
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