Question

Forsyth Company manufactures one product, it does not maintain any beginning or ending inventories, and its uses a standard cost system. During the year, the company produced and sold 10,000 units at a price of $155 per unit. Its standard cost per unit produced is $125 and its selling and administrative expenses totaled $245,000. Forsyth does not have any variable manufacturing overhead costs and it recorded the following variances during the year:

Materials price variance $6,800 F
Materials quantity variance $10,500 U
Labor rate variance $3,800 U
Labor efficiency variance $4,700 F
Fixed overhead budget variance $2,800 F
Fixed overhead volume variance $12,300 F

Required:
a. When Forsyth closes its standard cost variances, the cost of goods sold will increase (decrease) by how much?
b. Prepare an income statement for the year.

Answer 1

a. Cost of goods sold will decrease by $12,300.

b. Net income = $67,300

Step-by-step explanation:

a. When Forsyth closes its standard cost variances, the cost of goods sold will increase (decrease) by how much?

This can be determined by calculating the net variance as follows:

Forsyth Company

Calculation of Net Variance

Details Amount ($)

Materials price variance (F) 6,800

Materials quantity variance (U) (10,500)

Labor rate variance (U) (3,800)

Labor efficiency variance (F) 4,700

Fixed overhead budget variance (F) 2,800

Fixed overhead volume variance (F) 12,300

Net variance 12,300

Since the net variance of $12,300 is positive which is favorable, this implies that the cost of goods sold will decrease by $12,300.

b. Prepare an income statement for the year.

The income statement for the year can be prepared as follows:

Forsyth Company

Income Statement for the Year

Details $ $

Sales (10,000 * $155) 1,550,000

Cost of goods sold (COGS):

Standard COGS (10,000 * $125) (1,250,000)

Net variance 12,300

Net Cost of goods sold (1,237,700)

Gross margin 312,300

Selling and administrative expenses (245,000)

Net income 67,300