Chapter 24, Problem 5BP

a.

To determine

Compute material price and quantity price variances.

Explanation of Solution

Calculate material price variance.

$\begin{array}{c}\text{Material price variance}\text{=}\left(\text{Standard price }-\text{Actual price}\right)\times \text{Actual quantity}\\ \text{=}\left(\$1.32-\$1.28\right)\times 34\text{,000}\text{gallons}\\ \text{=}\text{\$1,360}\text{favorable}\end{array}$

Working note:

Calculate actual price.

$\begin{array}{c}\text{Actual price}\text{(per pound)}\text{=}\frac{\text{Direct material cost}}{\text{Actual quantity}}\\ =\frac{\$43,520}{34,000\text{gallons}}\\ =\$1.28\text{per gallon}\end{array}$ (1)

Calculate material quantity variance.

$\begin{array}{c}\text{Material quantity variance}\text{=}\left(\text{Standard quantity}-\text{Actual quantity}\right)\times \text{Standard price}\\ \text{=}\left(30,000\text{gallons}-34,000\text{gallons}\right)\times \$1.32\\ =-\$5,280\text{unfavorable}\end{array}$

Working note:

Calculate standard quantity.

$\begin{array}{l}\text{Standard quantity =}\text{Standard cases}\times \text{Standard quantity allowed per case}\\ \text{=}10\text{,000}\text{cases}\times \text{\$3}\text{gallon per case}\\ \text{=}30,000\text{gallons}\end{array}$ (2)

b.

To determine

Compute the labor rate and efficiency variances.

Explanation of Solution

Calculate labor rate variance.

$\begin{array}{c}\text{Labor rate variance}\text{=}\left(\text{Standard rate }-\text{Actual rate}\right)\times \text{Actual labor hours}\\ \text{=}\left(\$15-\$14\right)\times 8,300\text{hours}\\ =\$8,300\text{Favorable}\end{array}$

Compute labor efficiency variance.

$\begin{array}{c}\text{Labor efficency variance}\text{=}\left(\text{Standard hours}-\text{Actual hours}\right)\times \text{Standard rate}\\ \text{=}\left(\text{8,000}\text{hours}-8\text{,300}\text{hours}\right)\times \$15\\ =-\$4,500\text{unfavorable}\end{array}$

Working note:

$\begin{array}{c}\text{Standard hours}\text{(Allowed)}\text{=}\text{Standard cases}\times \text{Standard hours allowed per case}\\ \text{= 10,000}\text{cases}\times \text{ \$0}\text{.80}\text{hours per case}\\ \text{=}8,000\text{hours}\end{array}$ (3)

c.

To determine

Compute the manufacturing overhead spending and volume variances.

Explanation of Solution

Calculate manufacturing overhead spending variances.

$\begin{array}{c}\text{Overhead spending variance}\text{=}\text{Standard overhead cost}-\text{Actual overhead cost }\\ \text{=}\text{\$21,252}-\$21,000\\ =\$252\text{Favorable}\end{array}$

Working notes:

Calculate Stand overhead cost.

$\begin{array}{c}\text{Standard overhead cost}\text{= }\left(\begin{array}{l}\text{Variable overhead costs +}\text{Fixed }\\ \text{manufacturing overhead costs}\end{array}\right)\\ \text{=}\left(\$10,000\text{cases}\times \text{\$1}\text{.60}\text{per case}\right)+\$5,252\\ =\$16,000+\$5,252\\ =\$21,252\end{array}$ (4)

Calculate overhead volume variance.

$\begin{array}{c}\text{Overhead volume variance =}\text{Applied overhead cost}-\text{Standard overhead cost}\\ \text{=}\text{\$21,200}-\$21,252\\ =-\$52\text{Unfavorable}\end{array}$

Working note:

Calculate applied overhead cost.

$\begin{array}{c}\text{Applied overhead cost}\text{=}\left(\begin{array}{l}\text{Standard}\text{cases }\times \text{Total }\\ \text{overhead application rate}\end{array}\right)\\ \text{=}10\text{,000}\text{cases}\times \text{\$2}\text{.12}\\ \text{=}\text{\$21,200}\end{array}$ (5)

d.

To determine

Prepare journal entries to record (1) charge materials (at standard) to work in process, (2) Charge direct labor (at standard) to work in process, (3) Charge manufacturing overhead (at standard) to work in process, (4) Transfer the cost of 5,000 cases to finished goods, and (5) close any over-under applied overhead to cost of goods sold.

Explanation of Solution

(1)

Prepare journal entry to record charge materials (at standard) to work in process.

Account titles and Explanation	Debit	Credit
Work in process inventory	$39,600
Material quantity variance	$5,280
Material price variance		$1,360
Direct material inventory		$43,520
(To record cost of direct materials charged to production)

Table (1)

Working note:

Calculate work in process inventory – direct materials.

$\begin{array}{c}\begin{array}{l}\text{Work in process }\\ \text{inventory - Direct materials}\end{array})\text{=}\left(\begin{array}{l}\text{Actual cases}\times \text{Standard quantity allowed per}\\ \text{ case}\times \text{Direct materials standard price}\end{array}\right)\\ \text{=}10\text{,000}\text{cases}\times \text{3}\text{gallons allowed per case}\times \text{\$1}\text{.32}\text{per gallon}\\ \text{=}\text{\$39,600}\end{array}$ (6)

• Work in process inventory is a current asset, and it is increased. Therefore, debit work in process inventory account for $39,600.
• Material quantity variance is a component of stockholders’ equity, and it is decreased. Therefore, debit material quantity variance account for $5,280.
• Material price variance is a component of stockholders’ equity, and it is increased. Therefore, credit material price variance account for $1,360.
• Direct material inventory is a current asset, and it is decreased. Therefore, credit direct material inventory account for $43,520.

(2)

Prepare journal entry to record Charge direct labor (at standard) to work in process.

Account titles and Explanation	Debit	Credit
Work in process inventory	$120,000
Labor efficiency variance	$4,500
Labor rate variance		$8,300
Direct labor		$116,200
(To record the cost of direct labor charged to production)

Table (2)

Working note:

Calculate work in process inventory – direct labor.

$\begin{array}{c}\begin{array}{l}\text{Work in process inventory }\\ \text{- direct labor}\end{array})\text{=}\left(\begin{array}{l}\text{Actual cases}\times \text{standard hours allowed}\\ \text{ per case}\times \text{Direct labor standard rate}\end{array}\right)\\ \text{=}10,000\text{cases}\times \text{0}\text{.80}\text{hours allowed per case}\times \text{\$15}\text{per hour}\\ \text{=}\text{\$120,000}\end{array}$ (7)

• Work in process inventory is a current asset, and it is increased. Therefore, debit work in process inventory account for $120,000.
• Labor efficiency variance is a component of stockholders’ equity, and it is decreased. Therefore, debit labor efficiency variance account for $4,500.
• Labor rate variance is a component of stockholders’ equity, and it is increased. Therefore, credit labor rate variance account for $8,300.
• Direct labor is a current asset, and it is decreased. Therefore, credit direct labor account for $116,200.

(3)

Prepare journal entry to record Charge manufacturing overhead (at standard) to work in process.

Account titles and Explanation	Debit	Credit
Work in process inventory	$21,200
Overhead volume variance	$52
Overhead spending variance		$252
Manufacturing overhead		$21,000
(To record overhead applies to production)

Table (3)

• Work in process inventory is a current asset, and it is increased. Therefore, debit work in process inventory account for $21,200.
• Overhead volume variance is a component of stockholders’ equity, and it is decreased. Therefore, debit overhead volume variance account for $52.
• Overhead spending variance is a component of stockholders’ equity, and it is increased. Therefore, credit overhead spending variance account for $252.
• Manufacturing overhead is a component of stockholders’ equity, and it is increased. Therefore, credit manufacturing overhead account for $21,000.

(4)

Prepare journal entry to record Transfer the cost of 5,000 cases to finished goods.

Account titles and Explanation	Debit	Credit
Finished goods inventory	$180,800
Work in process inventory		$180,800
(To record transfer to finshed goods inventory)

Table (4)

Working note:

Calculate work in process inventory.

$\begin{array}{c}\text{Work in process inventory}=\text{Direct materials}+\text{Direct labor +Overhead}\\ \text{=}\text{\$39,600}\text{+\$1200,000}\text{+\$21,200}\\ \text{=}\text{\$180,800}\end{array}$ (8)

• Finished goods inventory is a current asset, and it is increased. Therefore, debit finished goods inventory account for $180,800.
• Work in process inventory is a current asset, and it is decreased. Therefore, credit work in process inventory account for $180,800.

(5)

Prepare journal entry to record close overhead variances to cost of goods sold.

Account titles and Explanation	Debit	Credit
Overhead spending variance	$252
Overhead volume variance		$52
Cost of goods sold		$200
(To record close overhead variance to cost of goods sold)

Table (5)

• Overhead spending variance is a component of stockholders equity, and it is decreased. Therefore, debit overhead spending variance account for $252.
• Overhead volume variance is a component of stockholders’ equity, and it is increased. Therefore, credit overhead volume variance account for $52.
• Cost of goods sold is a component of stockholders’ equity, and it is increased. Therefore, credit cost of goods sold account for $200.