The Kordell Company started business on January 1, 2013, in Raleigh. The company adopted a standard absorption costing system for its one product—a football for use in collegiate intramural sports. Because of the extensive handcrafting needed to do quality assurance on the final product, Kordell chose direct labor as the application base for overhead and decided to use the proration method to account for variances at year-end.
Kordell expected to make and sell 80,000 footballs the first year; each football was budgeted to use 1 pound of leather and require 15 minutes of direct labor work. The company expected to pay $ 1 for each pound of leather and compensate workers at an hourly wage of $ 16. Kordell has no variable overhead costs, but expected to spend $ 200,000 on fixed manufacturing overhead in 2013.
In 2013, Kordell actually made 100,000 footballs and sold 80,000 of them for a total revenue of $ 1 million. The expenses incurred were as follows:
Fixed manufacturing costs ............. $ 300,000
Leather costs (110,000 pounds bought and used) .... $ 121,000
Direct labor costs (30,000 hours) ............ $ 465,000
1. Compute the following variances for 2013, and indicate whether each is favorable ( F) or unfavorable (U):
a. Direct materials efficiency variance
b. Direct materials price variance
c. Direct labor efficiency variance
d. Direct labor price variance
e. Total manufacturing overhead spending variance
f. Fixed overhead flexible budget variance
g. Fixed overhead production-volume variance
2. Compute Kordell Company’s gross margin for its first year of operation.