Petrillo Company produces engine parts for large motors. The company uses a standard cost system for production costing and control. The standard cost sheet for one of its higher volume products (a valve) is as follows:
Direct materials (7 lbs. @ $5.40)........ $37.80
Direct labor (1.75 hrs. @ $18)......... 31.50
Variable overhead (1.75 hrs. @ $4.00)..... 7.00
Fixed overhead (1.75 hrs. @ $3.00)....... 5.25
Standard unit cost............. $81.55
During the year, Petrillo had the following activity related to valve production:
a. Production of valves totaled 20,600 units.
b. A total of 135,400 pounds of direct materials was purchased at $5.36 per pound.
c. There were 10,000 pounds of direct materials in beginning inventory (carried at $5.40 per
pound). There was no ending inventory.
d. The company used 36,500 direct labor hours at a total cost of $656,270.
e. Actual fixed overhead totaled $110,000.
f. Actual variable overhead totaled $168,000. Petrillo produces all of its valves in a single plant. Normal activity is 20,000 units per year. Standard overhead rates are computed based on normal activity measured in standard direct labor hours.
1. Compute the direct materials price and usage variances.
2. Compute the direct labor rate and efficiency variances.
3. Compute overhead variances using a two-variance analysis.
4. Compute overhead variances using a four-variance analysis.
5. Assume that the purchasing agent for the valve plant purchased a lower-quality direct material from a new supplier. Would you recommend that the company continue to use this
cheaper direct material? If so, what standards would likely need revision to reflect this decision? Assume that the end product’s quality is not significantly affected.
6. Prepare all possible journal entries (assuming a four-variance analysis of overhead variances).

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