Chapter 21, Problem 6PSA

Problem 21-6A^A Materials, labor, and overhead variances recorded and analyzed C1 P5

Boss Company’s standard cost accounting system recorded this information from its December operations

Standard direct materials cost…………………………………………….	$ 100.000
Direct materials quantity variance (unfavorable)………………………..	3.000
Direct materials price variance (favorable) ………………………………..	500
Actual direct labor cost …………………………………………………….	90.000
Direct labor efficiency variance (favorable) ……………………………….	7.000
Direct labor rato variance (unfavorable). …………………………………..	1.200
Actual overhead cost ……………………………………………………….	375.000
Volume variance (unfavorable) …………………………………………….	12.000
Controllable variance (unfavorable)…………………………………………..	9.000

Required

1. Prepare December 31 journal entries to record the company’s costs and variances for the month. (Do not prepare the journal entry to close the variances.)
Check (1) Dr. Work in process Inventory (for overhead), $354.000
Analysis Component

2. Identify the variances that would attract the attention of a manager who uses management by exception. Explain what action (s) the manager should consider.

To determine

To prepare: The journal entries for the given transactions.

Explanation of Solution

The favorable price variance and unfavorable quantity variance charged to raw material inventory.

Date	Account title and explanation	Post ref.	Debit ($)	Credit ($)
Dec 31	Goods in process inventory		100,000
	Direct material quantity variance		3,000
	Direct material price variance			500
	Raw material inventory			102,500
	(To charge favorable price variance and unfavorable quantity variance to raw material inventory )

Table (1)

• The goods in process inventory is an asset account and it records an increase with the record of direct material’s cost, hence it is debited.
• The direct material quantity variance is an unfavorable variance, hence it is debited.
• The direct material price variance is a favorable variance, hence it is credited.
• The raw material inventory account is an asset account and as the variances are charged to raw material inventory it is credited.

Working note:

Calculation of the raw material inventory,

     $\begin{array}{c}\text{Raw}\text{material}\text{inventory}=\left(\begin{array}{l}\text{Goods}\text{in}\text{process}\text{inventory}\\ +\text{Direct}\text{material}\text{quantity}\text{variance}\\ -\text{Direct}\text{material}\text{price}\text{variance}\end{array}\right)\\ =\left(\$100,000+\$3,000-\$500\right)\\ =\$102,500\end{array}$

The amount charged in raw material inventory account is $102,500.

The favorable labor efficiency variance and unfavorable direct labor rate variance is charged.

Date	Account title and explanation	Post ref.	Debit ($)	Credit ($)
Dec 31	Goods in process inventory		95,800
	Direct labor rate variance		1,200
	Direct labor efficiency variance			7,000
	Factory payroll			90,000
	(To charge favorable labor efficiency variance and unfavorable direct labor rate variance)

Table (2)

• The goods in process inventory account is an asset account and it records an increase with the amount of difference recorded, hence it is debited.
• The direct labor rate variance is an unfavorable variance, hence is debited.
• The direct labor efficiency variance is a favorable variance, hence is credited.
• The factory payroll account records the amount which is incurred and is to be paid, hence is credited with the actual costs of direct labor.

Working note:

Calculation of the amount to be charged in goods in process inventory,

     $\begin{array}{c}\text{Goods}\text{in}\text{process}\text{inventory}=\left(\begin{array}{l}\text{Factory}\text{payroll}\\ +\text{Direct}\text{labor}\text{efficiency}\text{variance}\\ -\text{Direct}\text{labor}\text{rate}\text{variance}\end{array}\right)\\ =\left(\$90,000+\$7,000-\$1,200\right)\\ =\$95,800\end{array}$

The amount of goods in process inventory is $95,800.

The unfavorable volume variance and controllable variance is charged to factory overhead.

Date	Account title and explanation	Post ref.	Debit ($)	Credit ($)
Dec 31	Goods in process inventory		354,000
	Volume variance		12,000
	Controllable variance		9,000
	Factory overhead			375,000
	(To charge unfavorable volume and controllable variance to factory overhead)

Table (3)

• The goods in process inventory is an asset account, it records an increase with the amount of difference to be recorded as the amount of factory overhead, hence is debited.
• The unfavorable volume variance is debited when charged to factory overhead.
• The unfavorable controllable variance is debited when charged to factory overhead.
• The factory payroll account records the amount which is incurred and records the actual incurred overhead cost, hence is credited.

Working note:

Calculation of the amount of goods in process inventory,

     $\begin{array}{c}\text{Goods}\text{in}\text{process}\text{inventory}=\left(\begin{array}{l}\text{Factory}\text{overhead}\\ -\text{Volume}\text{variance}\\ -\text{Controllable}\text{variance}\end{array}\right)\\ =\left(\$375,000-\$12,000-\$9,000\right)\\ =\$354,000\end{array}$

The amount of goods in process inventory is $354,000.

To determine

The variances that attract the attention of manager using management by exception.

Explanation of Solution

• The management will focus more on unfavorable fixed volume variance which is of $12,000 because there is a significant amount of variance.
• The variance is arising because of the change in the budgeted overhead and applied overhead. The reason for the change in it should be analyzed.
• The total controllable variance is an unfavorable variance of $9,000 and it will also attract the attention of managers.
• This is because the management needs to analyze the reasons for using more amount than the standard quantity.
• The management as per the concept of management by exception focuses more on the unfavorable volume variance, unfavorable controllable variance, and direct material quantity variance.

Hence, the unfavorable fixed volume variance and total controllable variance are the variances that attract the attention of the management as per the management by exception.