Analysis and Decision-Making Case

It had been a whirlwind of a year for Dexter Corporation, with things happening so quickly that management hadn't had time to update inventory balances or the amount of gross margin generated on its products. Needless to say, it was time someone evaluated company progress. The accounting team gathered the following information.

Standard Quantity per Unit Standard Price

DM 3.0 pounds $4.00 per pound

DL 1.2 DL hours $14.00 per DL hour

Variable-MOH 2.0 machine hours $3.50 per machine hour

Fixed-MOH 2.0 machine hours $6.80 per machine hour

Other key budgeted and actual information:

Actual units produced: 25,300.

Actual DM quantity purchased: 79,000 pounds at $4.10 per pound.

Actual DM quantity used: 75,000 pounds.

Actual DL hours used: 31,200 hours at $14.25 per hour.

Actual machine hours used: 48,800.

Actual variable-MOH cost was $166,300; budgeted variable-MOH cost was $161,000.

Actual fixed-MOH cost was $320,000; budgeted fixed-MOH cost was $312,800.

Required

1. Conduct a complete variance analysis for all four main product costs (DM, DL, variable-MOH price and efficiency variances, and fixed-MOH price and volume variances). Specify the amount and sign of each variance.
2. Record journal entries for the following transactions using standard costing.
3. The purchase of DM on account.
4. The transfer of DM into production.
5. The accrual of DL cost.
6. Actual MOH cost incurred as follows.

• Variable-MOH costs included $100,000 of accrued indirect labor and $66,300 of accrued utility cost.
• Fixed-MOH costs included $200,000 of depreciation on plant assets and $120,000 of accrued supervisor salaries.

1. The application of variable-MOH and fixed-MOH cost to production.
2. Recognition of specific variable-MOH and fixed-MOH variances, when closing the respective MOH control accounts.
3. Completion of production on 25,300 units (there were no units still in process at the end of the year). The sale of 18,900 units on account for $80 each.
4. Show the effects of the above journal entries in T-accounts for the following specific accounts, and determine ending balances (assume all beginning balances were zero): DM Inventory, WIP Inventory, FG Inventory, COGS, Variable-MOH Control, and Fixed-MOH Control.
5. Explain what any ending balances in the T-accounts, from part (c), reflect in terms of types of resources and types of costs. (Hint: Do they reflect actual costs? Standard costs? Actual quantities? Standard quantities?)
6. Given the transactions to-date, how many variance accounts have existing balances? What are Dexter's options for dealing with these variances? Record the journal entry to write off all variances directly to COGS. Explain the purpose for writing off these variances.
7. How much will Dexter report for its adjusted COGS? What is its gross margin percentage taking this adjusted COGS into account? Did the company meet its 40% gross margin goal? How well did the production department manage its costs?