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:

Finished goods inventory at 12/31:
Direct materials	$87,000
Direct labor	130,500
Applied manufacturing overhead	104,400
Raw materials inventory at 12/31	$65,000
Cost of goods sold for the year ended 12/31:
Raw materials inventory at 12/31	$348,000
Direct labor	739,500
Applied manufacturing overhead	591,600
Direct materials price variance (unfavorable)	10,000
Direct materials usage variance (favorable)	15,000
Direct labor rate variance (unfavorable)	20,000
Direct labor efficiency variance (favorable)	5,000
Actual manufacturing overhead incurred	690,000

 

 

 

 

 

 

 

 

 

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.