Ch9 Recording And Evaluating Conversion Process Test Bank

Chapter 9

Recording and Evaluating Conversion Process Activities

MATCHING

1. Match the following overhead activity levels with the type of activity, type of cost, and type of cost driver listed below.

A. Facility-sustaining

B. Product-sustaining

C. Batch-related

D. Unit-related

_____ 1. Designing products

_____ 2. Insurance on buildings

_____ 3. Machine time used to manufacture product

_____ 4. Number of square feet in building

_____ 5. Ordering cost

_____ 6. Setup cost

_____ 7. Number of tests required to test product

_____ 8. BTU's of head needed to heat building

_____ 9. Assembling units

_____ 10. Inspecting product

Answers: 1. B; 2. A; 3 D; 4. A; 5. C; 6. C; 7. B; 8. A; 9. D; 10. D

2. Using the numbers 1–6 indicate the correct order of the steps in developing and applying ABC application rates that are listed below.

_____ A. Determine the appropriate cost driver for each activity.

_____ B. Determine the predetermined overhead rate for each cost driver.

_____ C. Estimate the amount of overhead related to each cost driver.

_____ D. Identify and classify production activities by level.

_____ E. Estimate the amount of each cost driver to be used.

_____ F. Apply manufacturing overhead to Work-in-Process Inventory using the predetermined overhead rates.

Answers: A. 2; B. 5; C. 3; D. 1; E. 4; F. 6

3. Acme Folding Chair Company has the following cost. Match the cost with one of the following four classifications.

A. Direct material cost

B. Direct labor cost

C. Manufacturing overhead cost

D. Selling and administrative cost

_____ 1. Salary of production supervisor

_____ 2. Aluminum tubing using for chair frames

_____ 3. Depreciation on the machinery on shop floor

_____ 4. Commission on sale of chairs

_____ 5. Boxes used to ship chairs

_____ 6. Webbing used in the chairs

_____ 7. Wages of workers who assemble chairs

_____ 8. Depreciation on finished goods warehouse

_____ 9. Cost of utilities used to run the manufacturing plant

_____ 10. Polish used to shine the aluminum before chairs are assembled

Answers: 1. C; 2. A; 3. C. 4. D; 5. D; 6. A; 7. B; 8. D; 9. C; 10. C

4. Match the following terms with the definitions listed below.

A. Activity-based costing

B. Actual manufacturing overhead

C. Applied manufacturing overhead

D. Cost pool

E. Full absorption costing

F. Manufacturing overhead

G. Overapplied overhead

H. Predetermined overhead rate

_____ 1. A temporary account used to reflect the indirect manufacturing cost of the

period

_____ 2. An estimated amount of overhead added to work-in-process during the period

_____ 3. The estimated amount of overhead divided by the estimated amount of the

cost driver

_____ 4. A costing system in which all production costs are applied to the products

manufactured during the period

_____ 5. A group of cost that change in response to a cost driver

_____ 6. A system for assigning cost to cost objects

_____ 7. The amount of overhead incurred during a time period

_____ 8. When the estimated amount of overhead included in work-in-process exceed

the actual cost of overhead

Answers: 1. F; 2. C; 3. H; 4. E; 5. D; 6. A; 7. B; 8. G

5. Match the following terms with the definitions below.

A. Direct labor price variance

B. Direct labor usage variance

C. Direct material price variance

D. Direct material usage variance

E. Direct material inventory variance

_____ 1. A variance that indicates the difference between the standard price of material

and what was actually paid for the material

_____ 2. A variance that indicates the difference between the standard hours for a

particular number of units and the hours actually used in producing the units

_____ 3. A variance that shows the difference between the standard cost of labor for the

units produced and the actual cost of the labor incurred on the units produce

_____ 4. A variance that indicates the difference between the cost of the material

purchased and the cost of the material necessary for the units produced

_____ 5. A variance that indicates the difference in material cost due to a change in the

amount of materials used per unit produced

6. The Memory Time Picture Frame Company has the following cost. Match the cost with one of the following four classifications.

A. Direct material cost

B. Direct labor cost

C. Manufacturing overhead cost

D. Selling and administrative cost

_____ 1. Glass for the frames

_____ 2. Wages paid for assembly workers

_____ 3. Depreciation on building housing in assembly facility

_____ 4. Salary of plant supervisor

_____ 5. Packing material to ship frames

_____ 6. Wood for frames

_____ 7. Depreciation on warehouse that houses wood and glass for frames

_____ 8. Cost of sales force commissions

_____ 9. Salary of president of company

_____ 10. Glass cleaner

7. The Spinners Ceiling Fan Company has the following cost. Match the cost with one of the following four classifications.

A. Direct material cost

B. Direct labor cost

C. Manufacturing overhead cost

D. Selling and administrative cost

_____ 1. Blades for fans

_____ 2. Wages paid for assembly workers

_____ 3. Salary of accounting department

_____ 4. Salary of plant supervisor

_____ 5. Packing material to ship fans

_____ 6. Polish to shine metal casing of fans

_____ 7. Utilities for assembly plant

_____ 8. Cost of sales force commissions

_____ 9. Electric motor for fan

_____ 10. Depreciation on building housing the assembly facility

8. Which of the following is not one of the activities of the conversion process?

A) Scheduling production

B) Obtaining raw material

C) Using labor and other manufacturing resources to create finished goods

D) Selling finished goods

9. Which of the following is an activity of the conversion process?

A) Scheduling production

B) Paying the salary of chief financial officer

C) Paying freight to ship finished inventory

D) Selling finished goods

10. Which of the following is not one of the costs of the conversion process?

A) Labor cost to assemble product

B) Freight cost paid to obtain raw material

C) Depreciation on raw materials warehouse

D) Cost to ship finished product to customer

11. Which of the following documents does not generate an accounting entry?

A) Production order

B) Materials requisition

C) Job cost record

D) All generate an accounting entry

12. This prenumbered document is issued by the production function and triggers the manufacture of the company's product:

A) Materials requisition

B) Production order

C) Job cost record

D) Sales invoice

13. Which of the following is not considered manufacturing overhead?

A) Depreciation on factory equipment

B) Supervisors salaries

C) Cost of utilities for factory

D) Depreciation on warehouse that stores finished goods

14. The cost of the wages of assembly line workers is:

A) direct labor.

B) indirect labor.

C) manufacturing overhead.

D) selling and administrative.

15. Depreciation on factory equipment is a(n):

A) selling and administrative cost.

B) manufacturing overhead cost.

C) other income (expense).

D) indirect material.

16. The journal entry to record the purchase of direct materials on account would include a:

A) debit to Manufacturing Overhead.

B) debit to Raw Materials Inventory.

C) credit to Accounts Receivable.

D) credit to Cash.

17. Which of the following is not included in cost of work-in-process?

A) Direct labor

B) Requisition of raw material

C) Purchase of raw material

D) Application of overhead

18. Which of the following is included in cost of work-in-process?

A) Depreciation on finished goods warehouse

B) Cost to ship finished goods to customer

C) Salary of manager of raw materials warehouse

D) Salary of vice president of finance

19. The journal entry to record the requisition of indirect materials from the raw materials storeroom and the transfer of the materials to the factory would include a:

A) credit to Cost of Goods Manufactured.

B) debit to Work-in-Process Inventory.

C) debit to Manufacturing Overhead.

D) credit to Accounts Payable.

20. The journal entry to record wages earned by assembly line workers would include a:

A) credit to Indirect Labor.

B) debit to Manufacturing Overhead.

C) debit to Work-in-Process Inventory.

D) credit to Cost of Goods Manufactured.

21. The journal entry to record wages earned by the factory maintenance personnel would include a:

A) credit to Direct Labor.

B) credit to Administrative Wages.

C) debit to Manufacturing Overhead.

D) debit to Work-in-Process Inventory.

22. The entry to deal with the overapplication of overhead during a time period is:

A) Manufacturing Overhead (applied)

Manufacturing Overhead (actual).

B) Manufacturing Overhead (applied)

Cost of Goods Sold.

C) Manufacturing Overhead (actual)

Work in process.

D) Finished Good Inventory

Manufacturing Overhead (applied).

23. The journal entry to record depreciation on production equipment would include a:

A) debit to Accumulated Depreciation – Equipment.

B) credit to Work-in-Process Inventory.

C) debit to Manufacturing Overhead.

D) credit to Cash.

24. The journal entry to record the application of manufacturing overhead to work in process includes a:

A) debit to Indirect Materials.

B) credit to Manufacturing Overhead.

C) credit to Work-in-Process Inventory.

D) debit to Cost of Goods Manufactured.

25. The estimated amount of overhead per cost driver is referred to as the:

A) predetermined overhead rate.

B) accounting cost rate.

C) overhead cost pool.

D) activity cost pool.

26. A group of costs that change in response to changes in the same cost driver referred to as:

A) a cost pool.

B) activity costs.

C) conversion costs.

D) a cost accumulation group.

27. All of the following are activity levels except:

A) unit related.

B) driver related.

C) facility sustaining.

D) product sustaining.

28. The activity "setting up machines" is part of the activity level:

A) product sustaining.

B) facility sustaining.

C) batch related.

D) unit related.

29. The activity "maintaining parts inventory" is part of the activity level:

A) product sustaining.

B) facility sustaining.

C) batch related.

D) unit related.

30. Overapplied manufacturing overhead exists when:

A) there is a debit balance in the manufacturing overhead account at the end of the period.

B) actual manufacturing overhead is less than applied manufacturing overhead.

C) the products manufactured during a period are undercosted.

D) applied overhead is larger than direct labor.

31. Underapplied manufacturing overhead exists when:

A) there is a debit balance in the manufacturing overhead account at the end of the period.

B) actual manufacturing overhead is less than applied manufacturing overhead.

C) the products manufactured during a period are undercosted.

D) applied overhead is larger than direct labor.

32. When the amount of over- or underapplied manufacturing overhead is small, the Manufacturing Overhead account is generally closed out to:

A) Cost of Goods Sold.

B) Work-in-Process Inventory.

C) Cost of Goods Manufactured.

D) Finished Goods Inventory, Work-in-Process Inventory, and Cost of Goods Sold.

33. When the amount of over- or underapplied manufacturing overhead is large, the Manufacturing Overhead account is generally closed out to:

A) Cost of Goods Sold.

B) Work-in-Process Inventory.

C) Cost of Goods Manufactured.

D) Finished Goods Inventory, Work-in-Process Inventory, and Cost of Goods Sold.

34. The journal entry to record the completion and transfer of the cost of goods manufactured includes a:

A) debit to Cost of Goods Sold.

B) debit to Manufacturing Overhead.

C) credit to Finished Goods Inventory.

D) credit to Work-in-Process Inventory.

35. When a product has completed the manufacturing process, what is the journal entry to record the transfer of its cost?

A) Debit to Cost of Goods Sold, credit Work-in-Process

B) Debit to Finished Goods, credit of Work-in-Process

C) Debit to Cost of Good Sold, credit to Finished Goods Inventory

D) Debit to Work-in-Process Inventory, credit to Finished Good Inventory

36. The journal entry to record the sale of a product, assuming a perpetual inventory system, would include a:

A) debit to Sales Revenue.

B) credit to Cost of Goods Sold.

C) debit to Work-in-Process Inventory.

D) credit to Finished Goods Inventory.

37. Which of the following is not associated with the manufacture and sale of a product?

A) Finished Goods Inventory

Work-in-Process

B) Cost of Goods Sold

Finished Goods Inventory

A/R

Sales

C) Work-in-Process

Raw Material Inventory

D) Manufacturing Overhead

Work-in-Process

38. Microsmart, Inc.'s ending balances for Work-in-Process and Finished Goods Inventory were $365,800 and $743,200, respectively. The unadjusted Cost of Goods Sold was $1,543,700, and underapplied manufacturing overhead amounted to $148,000, which was deemed significant. When Microsmart closed out the underapplied manufacturing overhead, the Cost of Goods Sold account would have been (rounded to the nearest whole dollar):

A) credited for $148,000.

B) debited for $106,324.

C) debited for $86,126.

D) credited for $14,189.

39. The entry to close out a small amount of overapplied manufacturing overhead would:

A) decrease the cost of goods manufactured.

B) decrease finished goods inventory.

C) increase cost of goods sold.

D) increase net income.

40. The entry to close out a significant amount of overapplied manufacturing overhead would affect all of the below except:

A) decrease the cost of goods manufactured.

B) decrease finished goods inventory.

C) increase cost of goods sold.

D) increase net income.

41. The costing system that reflects the amount of raw materials purchased, direct labor used, and manufacturing overhead applied in the Cost of Goods Sold account is the:

A) backflush costing system.

B) job order costing system.

C) process costing system.

D) direct costing system.

42. The predetermined manufacturing overhead rate per production run is:

A) $1,582.

B) $1,693.

C) $1,550.

D) $1,448.

43. The amount of manufacturing overhead applied to Work-in-Process Inventory is:

A) $846,370.

B) $829,250.

C) $775,000.

D) $745,000.

44. The amount of over/underapplied manufacturing overhead is:

A) $71,370 underapplied.

B) $54,250 underapplied.

C) $17,120 underapplied.

D) $54,250 overapplied.

45. The predetermined manufacturing overhead rate per move is:

A) $37.

B) $38.

C) $41.

D) $42.

46. The amount of manufacturing overhead applied to Work-in-Process Inventory is:

A) $94,300.

B) $87,400.

C) $87,043.

D) $80,674.

47. The amount of over- underapplied manufacturing overhead is:

A) $7,257 underapplied.

B) $6,369 underapplied.

C) $6,900 overapplied.

D) $ 357 overapplied

48. The total amount of raw materials put into production during the current period was:

A) $119,925.

B) $97,950.

C) $89,720.

D) $106,670.

50. The cost of goods available for sale was:

A) $660,800.

B) $717,600.

C) $854,900.

D) $883,300.

51. The unadjusted cost of goods sold was:

A) $854,900.

B) $717,600.

C) $675,100.

D) $660,800.

52. The amount of over- or underapplied manufacturing overhead was:

A) $ 5,800 underapplied.

B) $14,300 underapplied.

C) $ 8,500 overapplied.

D) $ 2,700 overapplied.

53. Assuming the over-underapplied manufacturing overhead was considered small and, therefore, closed out to Cost of Goods Sold, the cost of goods sold reported on the income statement for the period was:

A) $646,500.

B) $675,100.

C) $683,600.

D) $703,300.

54. Which of the following is not an inventory account for a manufacturer?

A) Raw materials

B) Finished goods

C) Work-in-process

D) Manufacturing overhead inventory

55. Which of the following shows the order of cost flows through the manufacturing inventories?

A) Raw materials, finished goods, work-in-process

B) Raw materials, work-in-process, finished goods

C) Work-in-process, raw materials, finished goods

D) Work-in-process, finished goods, raw materials

56. Which of the following is an example of a manufacturing overhead cost?

A) Salary of firm president

B) Lease payments on factory

C) Wages of machine operators

D) Depreciation of delivery trucks

57. Crawford, Inc. manufactures lamps. Which of the following is a direct labor cost?

A) Wages of machine operators

B) Wages of shop foreperson

C) Salary of office manager

D) Salary of president

58. Hunter Corporation, a computer manufacturer, tests each completed computer before shipping it. This is an example of what kind of cost?

A) Product sustaining

B) Facility sustaining

C) Batch related

D) Unit related

59. Suranden Company manufacturers oil-drilling equipment. The utilities costs incurred in machining the drilling equipment is an example of what kind of cost?

A) Product sustaining

B) Facility sustaining

C) Batch related

D) Unit related

60. Paltrow Corporation applies unit-related overhead at the rate of $100 per direct-labor hour. If 3,000 direct labor hours were used, which of the following entries should be made?

A) Debit to finished goods and credit to manufacturing overhead

B) Debit to manufacturing overhead and credit to finished goods

C) Debit to work-in-process and credit to manufacturing overhead

D) Debit to manufacturing overhead and credit to work-in-process

61. Reynolds Company has estimated its finished goods inventory-handling costs at $240,000. It has determined that an appropriate cost driver is the number of units completed. It estimates that 500,000 units will be completed this year. If 40,000 units are completed during the current month, what amount of inventory-handling cost should be recognized?

A) $83,333

B) $24,000

C) $20,000

D) $19,200

62. Winslett Company had a $34,000 beginning balance in its raw materials inventory and a $30,000 ending balance. During the period $197,000 of raw materials was purchased. What amount of raw materials was used?

A) $201,000

B) $197,000

C) $193,000

D) $ 4,000

63. What was Dodd's cost of goods manufactured for July?

A) $314,000

B) $306,000

C) $298,000

D) $390,000

64. What was Lange's cost of goods sold for July?

A) $320,000

B) $314,000

C) $308,000

D) $348,000

65. The differences between standard and actual financial amounts of inputs are referred to as:

A) standard deviations.

B) variances.

C) appraisals.

D) exceptions.

66. The standard cost for direct labor is $190,000 if the company produces 15,200 units of product. Actual direct labor cost to produce 15,800 units of product totaled $213,300. What is the standard cost for direct labor at the actual level of production?

A) $190,000

B) $197,500

C) $205,200

D) $213,300

67. The standard cost for direct labor is $190,000 if the company produces 15,200 units of product. Actual direct labor cost to produce 15,800 units of product totaled $213,300. What is price variance and is it favorable or unfavorable?

A) $19,800, unfavorable

B) $23,300, unfavorable

C) $19,800, favorable

D) $23,300, favorable

68. The standard cost for direct material is $45,000 if the company produces 10,000 units of product. Actual direct materials used to produce 10,500 units of product amounted to $48,300. What is the standard cost for the direct material at the actual level of production?

A) $45,000

B) $46,000

C) $47,250

D) $48,300

69. The standard cost for facility sustaining manufacturing overhead is $536,000 if the company produces 78,000 units of product. Actual facility sustaining manufacturing overhead to produce 79,500 units of product was $531,500. What is the standard cost of sustaining manufacturing overhead at the actual level of production?

A) $521,472

B) $531,500

C) $536,000

D) $546,308

70. The direct labor price variance is calculated as

A) (Actual Price – Standard Price) × Actual Quantity

B) (Standard Price – Actual Price) × Standard Quantity Allowed

C) (Standard Quantity Allowed – Actual Quantity) × Actual Price

D) (Actual Quantity – Standard Quantity Allowed) × Standard Price

71. The direct labor usage variance is calculated as

A) (Standard Price – Actual Price) × Actual Quantity

B) (Actual Price – Standard Price) × Standard Quantity Allowed

C) (Standard Quantity Allowed – Actual Quantity) × Actual Price

D) (Actual Quantity – Standard Quantity Allowed) × Standard Price

72. The direct materials price variance is calculated as

A) (Standard Price – Actual Price) × Standard Quantity Allowed

B) (Actual Price – Standard Price) × Actual Quantity Purchased

C) (Standard Quantity Allowed – Actual Quantity Purchased) × Actual Price

D) (Actual Quantity Purchased – Standard Quantity Allowed) × Standard Price

73. The direct materials usage variance is calculated as

A) (Standard Price – Actual Price) × Actual Quantity Used

B) (Actual Price – Standard Price) × Standard Quantity Allowed

C) (Standard Quantity Allowed – Actual Quantity Used) × Actual Price

D) (Actual Quantity Used – Standard Quantity Allowed) × Standard Price

74. The direct materials inventory variance is calculated as

A) (Actual Price – Standard Price) × Actual Quantity Used

B) (Standard Price – Actual Price) × Standard Quantity Allowed

C) (Actual Quantity Used – Actual Quantity Purchased) × Actual Price

D) (Actual Quantity Purchased – Actual Quantity Used) × Standard Price

75. The direct labor price variance is:

A) $15,730, unfavorable.

B) $23,975, unfavorable.

C) $15,275, favorable.

D) $23,520, favorable.

76. The direct labor usage variance is:

A) $15,275, unfavorable.

B) $23,975, unfavorable.

C) $15,730, favorable.

D) $23,520, favorable.

77. The direct labor price variance is:

A) $2,850, unfavorable.

B) $2,925, favorable.

C) $4,125, favorable.

D) $4,200, unfavorable.

78. The direct labor usage variance is:

A) $2,850, unfavorable.

B) $2,925, favorable.

C) $4,125, favorable.

D) $4,200, unfavorable.

79. The direct materials price variance is:

A) $3,750, favorable.

B) $3,850, favorable.

C) $3,880, unfavorable.

D) $4,000, unfavorable.

80. The direct materials usage variance is:

A) $ 750, unfavorable.

B) $ 780, favorable.

C) $3,000, unfavorable.

D) $3,750, favorable.

81. The direct materials inventory variance is:

A) $ 750, unfavorable.

B) $ 780, favorable.

C) $3,000, unfavorable.

D) $3,750, favorable.

82. Which of the following statements about variance analysis is correct?

A) All variances should be investigated.

B) Favorable price variances should be rewarded.

C) Unfavorable quantity variances are the fault of production.

D) Management should investigate only variances that are relatively large.

83. Determine the cost of direct materials issued into production.

A) $524,000

B) $306,000

C) $258,000

D) $250,000

84. Determine the cost of goods manufactured.

A) $1,084,000

B) $1,210,000

C) $1,231,000

D) $1,336,000

85. The direct materials inventory variance is:

A) $4,250, favorable.

B) $4,425, unfavorable.

C) $6,800, favorable.

D) $7,080, unfavorable.

86. The direct materials price variance is:

A) $ 4,250, unfavorable.

B) $ 4,425, favorable.

C) $11,865, unfavorable.

D) $12,145, favorable.

87. The direct materials usage variance is:

A) $4,250, unfavorable.

B) $4,425, favorable.

C) $6,800, unfavorable.

D) $7,080, favorable.

88. A large U.S. manufacturer recently announced that it was "in the dark" about the costs of producing more than half its products. Why might this situation have adverse effects on the firm?

89. Describe the flow of costs through the conversion cycle. [This can also be stated as: Draw a picture showing the flow of costs through the conversion cycle.]

90. If a firm tried to use actual overhead instead of applied overhead in determining product costs, what would be the result.

91. The purchasing department is responsible for materials price variances. Do you agree or disagree with this statement? Explain.

92. Dynamic company has an unfavorable material price variance and a favorable usage variance. Explain what might have caused both variances.

93. Explain how a favorable direct labor usage variance might indicate problems with the production process.

94. Prepare journal entries to record the following transactions:

(a) Purchased $38,500 of raw materials on account

(b) Transferred $22,400 of direct materials and $6,350 of indirect materials into production

(c) Recorded $5,800 of direct labor and $7,630 of indirect labor

(d) Paid $3,200 for factory utilities

(e) Received and paid an advertising bill for $8,000

(f) Recorded $1,860 of depreciation on the factory equipment

(g) Manufacturing overhead of $18,500 was applied to production

(h) Completed product with a total cost of $39,750 and transferred it to the finished goods warehouse

(i) Closed the under- overapplied manufacturing overhead. The amount was deemed immaterial

(j) Sold product costing $17,240 for $26,500 on account

95. Ultimate Products Company manufactures three types of hair conditioner, Dry Formula, Normal Formula, and Oily Formula. Ultimate applies product-sustaining manufacturing overhead to each product based on the number of hours of development time. The company estimated that 1,400 hours of development time would be used during the current year and that product-sustaining manufacturing overhead costs would be $156,800. At year-end it was found that the Dry Formula, Normal Formula, and Oily Formula used 650, 475, and 550 hours of development time, respectively. Actual product-sustaining manufacturing overhead was $182,400. Determine the (a) predetermined manufacturing overhead rate for product-sustaining manufacturing overhead, (b) the amount of manufacturing overhead applied to each product, and (c) the total amount of over- or underapplied manufacturing overhead for the year. Assuming the amount of over- or underapplied overhead is deemed immaterial, prepare the journal entry to close it out.

Answers:

96. Ridgeline Computer Company, which manufactures computer parts, gathered the following information at its most recent year-end:

Determine the (a) cost of goods manufactured, (b) cost of goods sold, and (c) gross margin. Assume any over- or underapplied manufacturing overhead is closed out to Cost of Goods Sold.

97. Ozark Industries gathered the following direct labor and direct materials cost information for the month of April:

Calculate the following ratios:

(a) direct labor price variance

(b) direct labor usage variance

(c) direct materials price variance

(d) direct materials usage variance

(e) direct materials inventory variance

98. Bollinger Industries manufactures backpacks. Selected data regarding standard costs follow:

Actual selected results for the month of January are shown below:

Calculate the following variances:

(a) Direct labor price variance

(b) Direct labor usage variance

(c) Direct materials price variance

(d) Direct materials usage variance

(e) Direct materials inventory variance

Answers:

(a) $1,350,575 – (151,750 × $8.75) = $22,762.50, unfavorable

(b) [151,750 – (33,800 × 4.5)] × $8.75 = $3,062.50, favorable

(c) $83,520 – (19,200 × $4.20) = $2,880, unfavorable

(d) [19,750 – (33,800 × .6)] × $4.20 = $2,226, favorable

(e) (19,200 – 19,750) × $4.20 = $2,310, favorable

99. Hokies Industries gathered the following direct labor and direct materials cost information for the month of June:

Calculate the following ratios and tell what they mean:

(a) Direct labor price variance

(b) Direct labor usage variance

(c) Direct materials price variance

(d) Direct materials usage variance

(e) Direct materials inventory variance

Answers:

(a) ($16.00 – $16.25) × 32,000 = $8,000, favorable; saved $0.25 per hour on each hour worked

(b) (32,000 – 31,500) × $16.25 = $8,125, unfavorable; used 500 more hours than should have used at a price of $16.25

(c) ($24.15 – $24.50) × 26,000 = $9,700, favorable; saved $9,700 by paying $0.35 less that standard for a liter of raw material on all liters purchased.

(d) (23,000 – 22,000) × $24.50 = $24,500, unfavorable; used 1,000 more liters of raw material than should have at a cost of $24.50 per liter. The money saved by getting a cheaper price may have resulted in wasted raw material in production

(e) (26,000 – 23,000) × $24.15 = $72,450, unfavorable. This represents money used unproductively because Hokies ordered more than was needed for production. The $72,450 that is setting idle could have been used for more productive activities. With a JIT system, there should be an Inventory Variance of $0.