Santiago Corporation manufactures one product. It does not maintain any beginning or ending Work in Process inventories. The company uses a standard cost system in which inventories are recorded at their standard costs and any variances are closed directly to Cost of Goods Sold. There is no variable manufacturing overhead. The standard cost card for the company's only product is as follows:
The standard fixed manufacturing overhead rate was based on budgeted fixed manufacturing overhead of $192,000 and budgeted activity of 12,000 hours.
During the year, the company completed the following transactions:
a. Purchased 53,000 liters of raw material at a price of $6.80 per liter.b. Used 47,620 liters of the raw material to produce 13,200 units of work in process.c. Assigned direct labor costs to work in process. The direct labor workers (who were paid in cash) worked 8,220 hours at an average cost of $19.20 per hour.d. Applied fixed overhead to the 13,200 units in work in process inventory using the predetermined overhead rate multiplied by the number of direct labor-hours allowed. Actual fixed overhead costs for the year were $180,700. Of this total, $116,700 related to items such as insurance, utilities, and indirect labor salaries that were all paid in cash and $64,000 related to depreciation of manufacturing equipment.e. Transferred 13,200 units from work in process to finished goods.f. Sold for cash 12,800 units to customers at a price of $56.50 per unit.g. Completed and transferred the standard cost associated with the 12,800 units sold from finished goods to cost of goods sold.h. Paid $39,000 of selling and administrative expenses.i. Closed all standard cost variances to cost of goods sold.Required:1. Compute all direct materials, direct labor, and fixed overhead variances for the year.2. Record the above transactions in the worksheet that appears below. The beginning balances have been provided for each of the accounts, including the Property, Plant, and Equipment (net) account which is abbreviated as PP&E (net).
3.Determine the ending balance (e.g., 12/31 balance) in each account.

1. Materials price variance = Actual quantity × (Average price − Standard price)= 53,000 liters × ($6.80 per liter − $6.00 per liter)= 53,000 liters × ($0.80 per liter)= $42,400 UnfavorableMaterials quantity variance:Standard quantity = Actual output × Standard quantity = 13,200 units × 3.6 liters per unit = 47,520 litersMaterials quantity variance = (Actual quantity − Standard quantity) × Standard price= (47,620 liters − 47,520 liters) × $6.00 per liter= (100 liters) × $6.00 per liter= $600 UnfavorableLabor rate variance = Actual hours × (Actual rate − Standard rate)= 8,220 hours × ($19.20 per hour − $18.50 per hour)= 8,220 hours × ($0.70 per hour)= $5,754 UnfavorableLabor efficiency variance:Standard hours = Actual output × Standard quantity = 13,200 units × 0.60 hours per unit = 7,920 hoursLabor efficiency variance = (Actual hours − Standard hours) × Standard rate= (8,220 hours − 7,920 hours) × $18.50 per hour= (300 hours) × $18.50 per hour= $5,550 UnfavorableBudget variance = Actual fixed overhead − Budgeted fixed overhead= $180,700 − $192,000= $11,300 FavorableVolume variance = Budgeted fixed overhead − Fixed overhead applied to work in process= $192,000 − (7,920 hours × $16.00 per hour)= $192,000 − ($126,720)= $65,280 Unfavorable2. & 3.
The explanations for transactions a through i are as follows:a. Cash decreases by the actual cost of the raw materials purchased, which is Actual quantity × Average price = 53,000 liters × $6.80 per liter = $360,400. Raw Materials increase by the standard cost of the raw materials purchased, which is Actual quantity × Standard price = 53,000 liters × $6.00 per liter = $318,000. The materials price variance is $42,400 Unfavorable.b. Raw Materials decrease by the standard cost of the raw materials used in production, which is Actual quantity × Standard price = 47,620 liters × $6.00 per liter = $285,720. Work in Process increases by the standard cost of the standard quantity of raw materials allowed for the actual output, which is Standard quantity × Standard price = (13,200 units × 3.6 liters per unit) × $6.00 per liter = 47,520 liters × $6.00 per liter = $285,120. The difference is the Materials Quantity Variance which is $600 Unfavorable.c. Cash decreases by the actual amount paid to direct laborers, which is Actual hours × Actual rate = 8,220 hours × $19.20 per hour = $157,824. Work in Process increases by the standard cost of the standard amount of hours allowed for the actual output, which is Standard hours × Standard rate = (13,200 units × 0.60 hours per unit) × $18.50 per hour = 7,920 hours × $18.50 per hour = $146,520. The difference consists of the Labor Rate Variance which is $5,754 Unfavorable and the Labor Efficiency Variance which is $5,550 Unfavorable.d. Cash decreases by the actual amount paid for various fixed overhead costs, which is $116,700. Work in Process increases by the standard amount of hours allowed for the actual output multiplied by the predetermined overhead rate, which is (13,200 units × 0.60 hours per unit) × $16.00 per hour = 7,920 hours × $16.00 per hour = $126,720. Property, Plant, and Equipment (net) decreases by the amount of depreciation for the period, which is $64,000. The difference is the Fixed Overhead (FOH) Budget Variance which is $11,300 Favorable and the Fixed Overhead (FOH) Volume Variance which is $65,280 Unfavorable.e. Work in Process decreases by the number of units transferred to Finished Goods multiplied by the standard cost per unit = 13,200 units × $42.30 per unit = $558,360. Finished Goods increases by the same amount.f. Cash increases by the number of units sold multiplied by the selling price per unit, which is 12,800 units × $56.50 per unit = $723,200. Retained Earnings increases by the same amount.g. Finished Goods decreases by the number of units sold multiplied by their standard cost per unit, which is 12,800 units × $42.30 per unit = $541,440. Retained Earnings decreases by the same amount.h. Cash and Retained Earnings decrease by $39,000 to record the selling and administrative expenses.i. All variance accounts take their balance to zero and they are closed to Cost of Goods Sold (which resides within Retained Earnings).