Direct Materials, Direct Labor, and Overhead Variances, Journal Entries Algers Company produces dry fertilizer. At the beginning of the year, Algers had the following standard cost sheet: Direct materials (5 lbs. @ $2.60) $13.00 Direct labor (0.75 hr. @ $18.00) 13.50 Fixed overhead (0.75 hr. @ $4.00) 3.00 Variable overhead (0.75 hr. @ $3.00) 2.25 Standard cost per unit $31.75 Algers computes its overhead rates using practical volume, which is 54,000 units. The actual results for the year are as follows: Units produced: 53,000 Direct materials purchased: 274,000 pounds at $2.50 per pound Direct materials used: 270,300 pounds Direct labor: 40,100 hours at $17.95 per hour Fixed overhead: $161,700 Variable overhead: $122,000 Required: 1. Compute price and usage variances for direct materials. MPV $ MUV $ 2. Compute the direct labor rate and labor efficiency variances. Labor Rate Variance $ Labor Efficiency Variance $ 3. Compute the fixed overhead spending and volume variances. Spending Variance $ Volume Variance $ 4. Compute the variable overhead spending and efficiency variances. Spending Variance $ Efficiency Variance $
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Direct Materials, Direct Labor, and
Algers Company produces dry fertilizer. At the beginning of the year, Algers had the following
| Direct materials (5 lbs. @ $2.60) | $13.00 |
| Direct labor (0.75 hr. @ $18.00) | 13.50 |
| Fixed overhead (0.75 hr. @ $4.00) | 3.00 |
| Variable overhead (0.75 hr. @ $3.00) | 2.25 |
| Standard cost per unit | $31.75 |
Algers computes its overhead rates using practical volume, which is 54,000 units. The actual results for the year are as follows:
- Units produced: 53,000
- Direct materials purchased: 274,000 pounds at $2.50 per pound
- Direct materials used: 270,300 pounds
- Direct labor: 40,100 hours at $17.95 per hour
- Fixed overhead: $161,700
- Variable overhead: $122,000
Required:
1. Compute price and usage variances for direct materials.
| MPV | $ | |
| MUV | $ |
2. Compute the direct labor rate and labor efficiency variances.
| Labor Rate Variance | $ | |
| Labor Efficiency Variance | $ |
3. Compute the fixed overhead spending and volume variances.
| Spending Variance | $ | |
| Volume Variance | $ |
4. Compute the variable overhead spending and efficiency variances.
| Spending Variance | $ | |
| Efficiency Variance | $ |
5. Prepare journal entries for the following:
- The purchase of direct materials
- The issuance of direct materials to production (Work in Process)
- The addition of direct labor to Work in Process
- The addition of overhead to Work in Process
- The incurrence of actual overhead costs
If an amount box does not require an entry, leave it blank.
| a. | |||
| b. | |||
| c. | |||
| d. | |||
| e. | |||
f. Prepare journal entries for the closing out of variances to Cost of Goods Sold. If an amount box does not require an entry, leave it blank.
First, close direct materials and direct labor variances:
Second, recognize the overhead variances:
If an amount box does not require an entry, leave it blank.
Third, close the overhead variances:
Note: Close the variances with a debit balance first. For compound entries, if an amount box does not require an entry, leave it blank.
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