Boomerang Devices Inc. manufactures sport hunting equipment. The company’s operations had the following results for the year ended December 2011. Actual production volume approximated normal levels. F = favorable variance, meaning actual costs were below standard; U = unfavorable variance, meaning actual costs exceeded standard. Assume all variances are considered to be material.
ItemAmount
Raw materials, at standard cost……………………………………………$ 210,000
Production wages, at standard cost………………………………………….670,000
Variable production overhead, at standard cost……………………………..180,000
Fixed production overhead, at standard cost………………………………..350,000
Total production cost, at standard………………………………………..SI.410.000
Raw materials variance…………………………………………………...$ 15,000 U
Labour variance…………………………………………………………….20,000 F
Variable overhead variance………………………………………………….3,000 F
Fixed overhead variance……………………………………………………50,000U
Net variances…………………………………………………………….$ 42,000 U
Required:
a. Determine the amount that Boomerang should include in the cost of inventories produced in the year.
b. If actual production volume were to be higher than normal, what would be the effect on the cost of inventories on a per unit basis? What if actual production volume were lower than normal?