Chapter 10, Problem 46P

Rocky Mountain Camping Equipment, Inc. has established the following direct-material standards for its two products.

During March, the company purchased 2,100 yards of tent fabric for its standard model at a cost of $13,440. The actual March production of the standard tent was 100 tents, and 1,250 yards of fabric were used. Also during March, the company purchased 800 yards of the same tent fabric for its deluxe backpacking tent at a cost of $6,320. The firm used 720 yards of the fabric during March in the production of 120 deluxe tents.

Required:

1. 1. Compute the direct-material purchase price variance and quantity variance for March.
2. 2. Prepare journal entries to record the purchase of material, use of material, and incurrence of variances in March.

To determine

Calculate the direct material purchase price variance and direct material quantity variance of Company R for the month of March.

Explanation of Solution

Variance: Variance refers to the difference level in the actual cost incurred and standard cost. The total cost variance is subdivided into separate cost variances; this cost variance indicates that the amount of variance that is attributable to specific casual factors.

Standard cost: In the accounting records, the term standard cost refers to the practice of replacement of an expected cost for an actual cost. Then the difference between the expected costs and actual costs showing the variance are also recorded periodically. A standard costs is also known as target cost or predetermined cost.

Calculate the direct material purchase price variance and direct material quantity variance of Company R for the month of March as follows:

Direct material purchase price variance:

$\begin{array}{c}\begin{array}{l}\text{Total direct material }\\ \text{purchase price variance}\end{array}\}\text{ = }\left[\begin{array}{l}\text{Direct material purchased price variance of standard tent }\pm \\ \text{Direct material purchased price variance of deluxe tent}\end{array}\right]\\ =\$840\text{ U (3)}-\$80\text{ F (4)}\\ \text{=\$760 U}\end{array}$

Working note (1):

Calculate the actual price for standard tent:

$\begin{array}{c}\text{Actaul price for standard tent = }\frac{\text{Cost of standard tent}}{\text{Number of yards}}\\ =\frac{\$13,440}{2,100\text{ yards}}\\ =6.40\text{ per yard}\end{array}$

Working note (2):

Calculate the actual price for deluxe tent:

$\begin{array}{c}\text{Actaul price for standard tent = }\frac{\text{Cost of standard tent}}{\text{Number of yards}}\\ =\frac{\$6,320}{800\text{ yards}}\\ =7.90\text{ per yard}\end{array}$

Working note (3):

Calculate the direct material purchased price variance of standard tent:

$\begin{array}{c}\begin{array}{l}\text{Direct mateiral}\\ \text{ price vairance}\end{array}\}\text{ = }\left[\begin{array}{l}\left(\text{Actual price }-\text{Standard price}\right)\times \\ \text{Actual quantity }\end{array}\right]\\ =\left(\$6.40(1)-\$6\right)\times 2,100\text{ yards}\\ \text{=\$840 Unfavorable}\end{array}$

Working note (4):

Calculate the direct material purchased price variance of deluxe tent:

$\begin{array}{c}\begin{array}{l}\text{Direct mateiral}\\ \text{ price vairance}\end{array}\}\text{ = }\left[\begin{array}{l}\left(\text{Actual price }-\text{Standard price}\right)\times \\ \text{Actual quantity }\end{array}\right]\\ =\left(\$7.90(2)-\$8\right)\times 800\text{ yards}\\ \text{=\$80 Favorable}\end{array}$

Direct material quantity variance:

$\begin{array}{c}\begin{array}{l}\text{Total direct material }\\ \text{quantity variance}\end{array}\}\text{ = }\left[\begin{array}{l}\text{Direct material quantity variance of standard tent }\pm \\ \text{Direct material quantity variance of deluxe tent}\end{array}\right]\\ =\$300\text{ U (7)}-\$0\text{ (8)}\\ \text{=\$300 U}\end{array}$

Working note (5):

Calculate the standard quantity of standard tent:

$\begin{array}{c}\text{Standard quantity = Total standard tents}\times \text{ Yards per tent}\\ \text{=100 tents }\times 12\text{ yards per tent}\\ \text{=1,200 yards}\end{array}$

Working note (6):

Calculate the standard quantity of deluxe tent:

$\begin{array}{c}\text{Standard quantity = Total standard tents}\times \text{ Yards per tent}\\ \text{=120 tents }\times 6\text{ yards per tent}\\ \text{=720 yards}\end{array}$

Working note (7):

Calculate the direct material quantity variance of standard tent:

$\begin{array}{c}\begin{array}{l}\text{Direct material }\\ \text{quantity variance }\end{array}\}\text{= }\left(\begin{array}{l}\text{Actual quantity}-\\ \text{Standard quantity (5)}\end{array}\right)\times \text{Standard price}\\ \text{=}\left(\text{1,250 yards}-1,200\text{ yards}\right)\times \$6\\ =\$300\text{ Unfavorable}\end{array}$

Working note (8):

Calculate the direct material quantity variance of deluxe tent:

$\begin{array}{c}\begin{array}{l}\text{Direct material }\\ \text{quantity variance }\end{array}\}\text{= }\left(\begin{array}{l}\text{Actual quantity}-\\ \text{Standard quantity (6)}\end{array}\right)\times \text{Standard price}\\ \text{=}\left(\text{720 yards}-720\text{ yards}\right)\times \$8\\ =\$0\end{array}$

To determine

Prepare journal entries for the given transactions of Company R for the month of March.

Explanation of Solution

Prepare journal entry to record the purchase of direct material and variance:

Date	Accounts and Explanation	Debit ($)	Credit ($)
	Raw materials inventory (9)	19,000
	Direct materials cost variance	760
	Accounts payable		19,760
	(To record the direct materials purchased on account)

Table (1)

• Raw materials inventory is an asset account, and it increases the value of asset. Hence, debit the raw materials inventory account with $19,000.
• Direct materials cost variance is expense account and it decreases the value of stockholder’s equity. Hence, debit the direct material cost variance account with $760.
• Accounts payable is a liability account, and it increases the value of liabilities. Hence, credit the accounts payable account with $19,760.

Working note (9):

Calculate the raw materials inventory:

$\begin{array}{c}\text{Raw material inventory =}\left(\begin{array}{l}\left(\text{Actual quantity }\times \text{Actual price}\right)\text{ +}\\ \left(\text{Standard quanity }\times \text{ Standard price}\right)\end{array}\right)\\ \text{= }\left[\begin{array}{l}\text{(2,100 yards×\$6 per yard) +}\\ \text{ (800 yards×\$8 per yard)}\end{array}\right]\\ =\$19,000\end{array}$

Prepare journal entry to record the use of direct material and variance:

Date	Accounts and Explanation	Debit ($)	Credit ($)
	Work-in-Process Inventory (10)	12,960
	Direct Materials quantity Variance	300
	Raw Materials Inventory $\left(\$12,960+\$300\right)$		13,260
	(To record the direct materials used in the production process)

Table (2)

• Work-in-process inventory is an asset account, and it increases the value of asset. Hence, debit the work-in-process inventory account with $12,960.
• Direct materials quantity variance is an expense account and it decreases the value of stockholder’s equity. Hence, debit t the direct material quantity variance account with $300.
• Raw materials inventory is an asset account, and it decreases the value of asset. Hence, credit the raw materials inventory account with $13,260.

Working note (10):

Calculate the work in process inventory:

$\begin{array}{c}\begin{array}{l}\text{Work in process}\\ \text{ inventory}\end{array}\}\text{ =}\left(\begin{array}{l}\left(\text{Actual quantity }\times \text{Actual labor rate}\right)\text{ +}\\ \left(\text{Standard quanity }\times \text{ Standard labor rate}\right)\end{array}\right)\\ \text{= }\left[\begin{array}{l}\text{(1,200 yards×\$6 per yard) +}\\ \text{ (720 yards×\$8 per yard)}\end{array}\right]\\ =\$12,960\end{array}$