Comprehensive review of Chapters 7 and 8, working backward from given variances. The Gallo Company uses a flexible budget and standard costs to aid planning and control of its machining manufacturing operations. Its costing system for manufacturing has two direct-cost categories (direct materials and direct manufacturing labor—both variable) and two overhead-cost categories (variable manufacturing overhead and fixed manufacturing overhead, both allocated using direct manufacturing labor-hours). At the 50,000 budgeted direct manufacturing labor-hour level for August, budgeted direct manufacturing labor is $1,250,000, budgeted variable manufacturing overhead is $500,000, and budgeted fixed manufacturing overhead is $1,000,000. The following actual results are for August:

The standard cost per pound of direct materials is $11.50. The standard allowance is 6 pounds of direct materials for each unit of product. During August, 20,000 units of product were produced. There was no beginning inventory of direct materials. There was no beginning or ending work in process. In August, the direct materials price variance was $1.10 per pound. In July, labor unrest caused a major slowdown in the pace of production, resulting in an unfavorable direct manufacturing labor efficiency variance of $40,000. There was no direct manufacturing labor price variance. Labor unrest persisted into August. Some workers quit. Their replacements had to be hired at higher wage rates, which had to be extended to all workers. The actual average wage rate in August exceeded the standard average wage rate by $0.50 per hour.

1. Compute the following for August:

a. Total pounds of direct materials purchased

b. Total number of pounds of excess direct materials used

c. Variable manufacturing overhead spending variance d. Total number of actual direct manufacturing labor-hours used

e. Total number of standard direct manufacturing labor-hours allowed for the units produced

f. Production-volume variance

2. Describe how Gallo’s control of variable manufacturing overhead items differs from its control of fixed manufacturing overhead items.


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