Q22E - Horngren'S Financial And Managerial Accounting

Question

The May 2018 revenue and cost information for McDonald Outfitters, Inc. follows: 

Sales Revenue (at standard) $ 610,000 

Cost of Goods Sold (at standard) 348,000 

Direct Materials Cost Variance 1,500 F 

Direct Materials Efficiency Variance 6,600 F 

Direct Labor Cost Variance 4,200 U 

Direct Labor Efficiency Variance 2,700 F 

Variable Overhead Cost Variance 2,800 U 

Variable Overhead Efficiency Variance 1,100  

Fixed Overhead Cost Variance 2,300 U 

Fixed Overhead Volume Variance 8,300 F 

Prepare a standard cost income statement for management through gross profit. Report all standard cost variances for management’s use. Has management done a good or poor job of controlling costs? Explain.

Step-by-Step Solution

Answer

The standard cost income statement is prepared to show the gross profit of $270,700

Step 1 Computation of the Material Variance

McDonald Outfitter Inc
Standard Cost Income Statement
For the month ended May 31, 2018
	Amount ($)	Amount ($)	Amount ($)
Sales Revenue (At standard)			610,000
Cost of goods sold (At standard)		348,000
Manufacturing Variance:
Direct Material Cost Variance	-1,500
Direct material Efficiency Variance	-6,600
Direct Labor cost Variance	4,200
Direct Labor Efficiency Variance	-2,700
Variable Overhead Cost Variance	2,800
Variable Overhead Efficiency Variance	1,100
Fixed Overhead Cost Variance	2,300
Fixed Overhead Volume Variance	-8,300
Total Manufacturing Variances		-8,700
Cost of goods sold (At Actual)			339,300
Gross Profit			270,700

Step 2 Computation of the Labor Variance

The favorable variance of direct materials and direct labor means that the management did an excellent job controlling the costs. Unfavorable variances are less than the favorable variance, which means that the company's overall management has done a good job at controlling costs.