Chapter 24, Problem 4AP

a.

To determine

Compute the materials price and quantity variances.

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.

Compute the materials price variances.

$\begin{array}{c}\text{Material price variance = Actual quantity used }\times \left(\text{Standard price}-\text{Actual price}\right)\\ =148,450\text{lbs}\text{.}\times \left(\$4.20/\text{lb}\text{.}-\$4.00\text{lb}\text{. (1)}\right)\\ =148,450\text{lbs}\text{.}\times \text{\$0}\text{.20/lb}\text{.}\\ \text{=\$29,690(Favorable)}\end{array}$

Compute the materials quantity variances.

$\begin{array}{c}\text{Material quantity variance = Standard price×}\left[\text{Standard quantity }-\text{Actual Quantity}\right]\\ \text{=\$4}\text{.20/lb}\text{.×}\left[\text{149,940 lbs}\text{. (2)}-\text{148,450 lbs}.\right]\\ \text{=}\$6,258\text{(Favorable)}\end{array}$

Therefore, the materials price and quantity variances of Enterprise S are $29,690 and $6,258.

Working Notes:

Calculate the actual price per pound:

$\begin{array}{c}\text{Actual price per pound=}\frac{\text{Direct material cost }}{\text{Pounds of direct materials used}}\\ =\frac{\$593,800}{148,450}\\ \text{=\$4}\text{.00/lbs}\text{.}\end{array}$

(1)

Calculate the standard quantity allowed:

$\begin{array}{c}\text{Standard quantity allowed =Batches produced }\times \left(\begin{array}{l}\text{Standard quantity}\\ \text{ allowed per batch}\end{array}\right)\\ =147\times 1,\text{020}\\ \text{=149,940}\end{array}$

(2)

b.

To determine

Compute the labor rate and efficiency variances.

Explanation of Solution

Compute the labor rate variances.

$\begin{array}{c}\text{Labor rate variance = Actual hours ×}\left(\text{Standard hourly rate - Actual hourly rate}\right)\\ \text{=2,200 hours }\times \left(\text{\$8}\text{.50/hour}-\text{\$8}\text{.00/hour (3)}\right)\\ =2,200\text{ hours }\times \text{\$0}\text{.50/ hour}\\ \text{=\$1,100 (Favorable)}\end{array}$

Compute the labor efficiency variances.

$\begin{array}{c}\text{Labor efficiency variance = Standard hourly rate ×}\left(\text{Standard hours - Actual hours}\right)\\ \text{= \$8}\text{.50/hour×}\left(2,058\text{hours (4)}-2,200\text{ hours}\right)\\ =\text{\$8}\text{.50/hour}\times -142\text{hours}\\ \text{=}-\text{\$1,207 (Unfavorable)}\end{array}$

Therefore, the labor rate and efficiency variances of Enterprise S are $1,100 and ($1,207).

Working Notes:

Calculate the actual rate per hour:

$\begin{array}{c}\text{Actual rate per hour =}\frac{\text{Direct labor cost }}{\text{Hours worked by employees}}\\ =\frac{\text{\$17,600}}{\text{2,200 hours}}\\ \text{=\$ 8}\text{.00/ hour}\end{array}$

(3)

Calculate the standard hours allowed:

$\begin{array}{c}\text{Standard hours allowed =Batches produced }\times \left(\begin{array}{l}\text{Standard hours}\\ \text{ allowed per batch}\end{array}\right)\\ =147\times 14\\ \text{=2,058 hours}\end{array}$

(4)

c.

To determine

Compute the manufacturing overhead spending and volume variances.

Explanation of Solution

Compute the manufacturing overhead spending variances.

Particulars	Amount in $	Amount in $
Standard Overhead cost incurred:
Fixed	2,800
Variable (5)	1,323
		4,263
Actual Overhead cost incurred:
Fixed	2,450
Variable	1,175
		3,625
Overhead spending variance (favorable)		498

(Table 1)

Compute the manufacturing overhead volume variances.

Particulars	Amount
Overhead applied at standard cost ($29 × 147 batches)	$ 4,263
Less: Standard overhead cost allowed	$4,123
Volume variance (favorable)	$ 140

(Table 2)

Therefore, the manufacturing overhead spending and volume variances of Enterprise S are $498 and $140.

Working note:

Calculate the standard variable overhead allowed:

$\begin{array}{c}\text{Standard variable overhead allowed=}\left(\begin{array}{l}\text{Variable overehead }\\ \text{appplication rate}\end{array}\right)\text{ ×Batches produced}\\ \text{=\$9×147}\\ \text{=\$1,323}\end{array}$

(5)

d.

To determine

Prepare journal entry to record to charge materials (at standard) to Work in Process.

Explanation of Solution

Prepare journal entry to record to charge materials (at standard) to Work in Process.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Work in process inventory ( at Standard) (6)	629,748
	Materials quantity variance (favorable)		6,258
	Materials price variance (favorable)		29,690
	Direct materials inventory (Actual)		593,800
	(To record the cost of direct materials charged to  production)

(Table 3)

• Work in process inventory is an asset and there is an increase in the value of an asset. Hence, debit the work in process inventory by $629,748.
• Materials quantity variance is an asset and there is a decrease in the value of an asset. Hence, credit the materials quantity variance by $6,258.
• Materials price variance is an asset and there is a decrease in the value of an asset. Hence, credit the materials price variance by $26,690.
• Direct materials inventory is an asset and there is a decrease in the value of an asset. Hence, credit the direct materials inventory by $593,800.

Working notes:

Calculate the work in process inventory for direct materials:

$\begin{array}{c}\begin{array}{l}\text{Work in process inventory }\\ \text{for direct materials }\end{array}\}\text{=147 Actual Batches}\times \left(\begin{array}{l}\text{Standard quantity allowed per batch }\times \\ \text{Standard price of direct materials }\end{array}\right)\\ =147\times \left(1,020\times \$4.20\right)\\ =147\times \$4,284\\ =\$629,748\end{array}$

(6)

e.

To determine

Prepare journal entry to record to charge direct labor (at standard) to Work in Process.

Explanation of Solution

Prepare journal entry to record to charge direct labor (at standard) to Work in Process.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Work in process inventory ( at Standard) (7)	17,493
	Labor efficiency variance (Unfavorable)	1,207
	Labor rate variance(Favorable)		1,100
	Direct Labor (Actual)		17,600
	(To record the cost of direct labor charged to production.)

(Table 4)

• Work in process inventory is an asset and there is an increase in the value of an asset. Hence, debit the work in process inventory by $17,493.
• Labor efficiency variance is an asset and there is an increase in the value of an asset. Hence, debit the labor efficiency variance by $1,207.
• Labor rate variance is an asset and there is a decrease in the value of an asset. Hence, credit the labor rate variance by $1,100.
• Direct labor is an asset and there is a decrease in the value of an asset. Hence, credit the direct labor by $17,600.

Working notes:

Calculate the work in process inventory for direct labor cost:

$\begin{array}{c}\begin{array}{l}\text{Work in process inventory }\\ \text{for direct labor cost }\end{array}\}\text{=147 Batches}\times \left(\begin{array}{l}\text{Standard hours allowed per batch }\times \\ \text{Standard rate of direct labor }\end{array}\right)\\ =147\times \left(14\times \$8.50\text{ per hour}\right)\\ =147\times \$119\\ =\$17,493\end{array}$

(7)

f.

To determine

Prepare journal entry to record to charge manufacturing overhead (at standard) to Work in Process.

Explanation of Solution

Prepare journal entry to record to charge manufacturing overhead (at standard) to Work in Process.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Work in process inventory ( at Standard)	4,263
	Overhead  spending variance		498
	Overhead volume variance		140
	Manufacturing Overhead (Actual)		3,625
	(To apply overhead to production.)

(Table 5)

• Work in process inventory is an asset and there is an increase in the value of an asset. Hence, debit the work in process inventory by $4,263.
• Overhead spending variance (Expense) is a component of stockholder’s equity and there is an increase in the value of expense. Hence, debit the overhead spending variance by $498.
• Overhead volume variance (Expense) is a component of stockholder’s equity and there is a decrease in the value of expense. Hence, credit the overhead volume variance by $140.
• Manufacturing overhead (Expense) is a component of stockholder’s equity and there is a decrease in the value of expense. Hence, credit the manufacturing expense by $3,625.

g.

To determine

Prepare journal entry to record the transfer of 147 batches of puppy meal produced in April to Finished Goods.

Explanation of Solution

Prepare journal entry to record the transfer of 147 batches of puppy meal produced in April to Finished Goods.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Finished goods inventory (at standard cost)	651,504
	Work in process inventory (at standard                   cost) (8)		651,504
	(To transfer147 batches of puppy meal to finished goods in April.)

(Table 6)

• Finished goods inventory is an asset and there is an increase in the value of an asset. Hence, debit the finished goods inventory by $651,504.
• Work in process inventory is an asset and there is a decrease in the value of an asset. Hence, credit the work in process inventory by $651,504.

Working Notes:

Calculate the work in process inventory at standard cost:

$\begin{array}{c}\text{Work in process inventory at standard cost=}\left(\begin{array}{l}\text{Total direct materials + direct labor + }\\ \text{manufacturing overhead charged}\end{array}\right)\\ \text{=\$629,748+\$17,493+\$4,263}\\ \text{=\$651,504}\end{array}$

(8)

h.

To determine

Prepare journal entry to record to close any over- or underapplied overhead to Cost of Goods Sold.

Explanation of Solution

Prepare journal entry to record to close any over- or underapplied overhead to Cost of Goods Sold.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Overhead  spending variance (favorable)	498
	Overhead volume variance (favorable)	140
	Cost of goods sold		638
	(To close overhead variances to cost of goods sold.)

(Table 7)

• Overhead spending variance (Expense) is a component of stockholder’s equity and there is an increase in the value of expense. Hence, debit the overhead spending variance by $498.
• Overhead volume variance (Expense) is a component of stockholder’s equity and there is an increase in the value of expense. Hence, debit the overhead volume variance by $140.
• Cost of goods sold (expense) is component of stockholder’s equity and there is a decrease in the value of expense. Hence, credit the cost of goods sold by $638.