Armstrong Chemical began operations in January. The company manufactures an acrylic car wax called Tough-Coat. The following standard cost estimates were developed several months before the company began operations, based on an estimated production of 1,000,000 units (pints):

Material X-1 (1 ounce) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.00

Material X-2 (1 pound) . . . . . . . . . . . . . . . . . . . . . . . . . . 0.50

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.80

Manufacturing overhead ($1,400,000 ÷ 1,000,000 units)... 1.40

Total estimated standard cost per pint . . . . . . . . . . . . . . . . . $3.70

During the year, 1,000,000 pints of Tough-Coat were actually produced, of which 900,000 were sold. Actual costs incurred during the year were:

Material X-1 purchased, 1,200,000 ounces @ $0.70 . . . . . . . . . $ 840,000

Material X-2 purchased, 1,150,000 pounds @ $0.50 . . . . . . . . . . 575,000

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 880,000

Manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . . ... 1,400,000

Total production cost incurred during the year . . . . . . . . . ...$3,695,000

The company’s inventories at the end of the year consisted of the following, with the Finished Goods inventory stated at standard cost:

Instructions
a. Do you agree with the president that revision of the $3.70 standard cost figure is not necessary?
b. Assume that you conclude that the standards for this first year of operations should be revised. Compute a “revised standard cost per unit” and determine the value to be assigned to the ending inventory of finished units using this revised standard cost.
c. What effect would this revaluation of Finished Goods inventory have on the company’s operating income?
d. Using the original standards, compute the following:
1. Materials price variance and quantity variance for material X-1.
2. Materials price variance and quantity variance for material X-2.
3. Total direct labor variance (do not separate into rate variance and usage variance).
4. Total manufacturing overheadvariance.

Transcribed Image Text:

Direct materials: Material X-1: 200,000 ounces Material X-2: 100,000 pounds $0.70 $0.50 $140,000 50,000 $190,000 Finished Goods: Tough-Coat: 100,000 pints$3.70 standard cost 370,000 Total inventory at December 31 $560,000