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 $135 per unit. Its standard cost per unit produced is $105 and its selling and administrative expenses totaled $235,000. Forsyth does not have any variable manufacturing overhead costs and it recorded the following variances during the year:

Materials price variance . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,500 F
Materials quantity variance . . . . . . . . . . . . . . . . . . . . . . . . $10,200 U
Labor rate variance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,500 U
Labor efficiency variance . . . . . . . . . . . . . . . . . . . . . . . . . . $4,400 F
Fixed overhead budget variance . . . . . . . . . . . . . . . . . . . . . $2,500 F
Fixed overhead volume variance . . . . . . . . . . . . . . . . . . . . $12,000 F
Required:
1. When Forsyth closes its standard cost variances, the cost of goods sold will increase (decrease) by how much?
2. Prepare an income statement for the year.

Answer 1

See below

Step-by-step explanation:

1. Computation of cost of goods sold

Particulars Amount

Materials Price Variance

$6,500F

Materials Quantity Variance

$10,200U

Labor Rate Variance

$3,500U

Labour Efficiency Variance

$4,400F

Fixed overhead budget variance $2,500F

Fixed overhead volume variance $12,000F

Cost of goods sold

$11,700

Cost of goods sold would increase by $11,700

2. Income statement for the year

Particulars

Sales

($135 × 10,000) $1,350,000

Less:

Cost of goods sold

Cost of goods sold at standard

($105 × 10,000)

$1,050,000

Add:

Variance adjustment

$11,700

Cost of goods sold

$1,061,700

Gross profit

$288,300

Less:

Selling and administrative expenses

($235,000)

Net operating income

$53,300