Chapter 24, Problem 6AP

a.

To determine

Compute the materials price variance and the materials quantity variance and also prepare journal entry to record the cost of direct materials used during June in the Work in Process account (at standard).

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 variance and the materials quantity variance:

$\begin{array}{c}\text{Material price variance = Actual quantity used }\times \left(\text{Standard price}-\text{Actual price}\right)\\ =\left(8,000\text{units}\times 11\text{ounces}\right)\times \left(\$0.15/\text{oz}-\$0.16\text{/oz}\right)\\ =88,000\text{}\text{ ounces}\times -\text{\$0}\text{.01/oz}\\ \text{=}-\text{\$880(Unfavorable)}\end{array}$

$\begin{array}{c}\text{Material quantity variance = Standard price×}\left[\text{Standard quantity }-\text{Actual Quantity}\right]\\ \text{=\$0}\text{.15/oz}\text{.×}\left[\text{80,000 ounces}-88,000\text{ounces}\right]\\ \text{=}-\$1,200\text{(Unfavorable)}\end{array}$

Therefore, the materials price and quantity variances of Incorporation P is ($880) and ($1,200).

Prepare journal entry to record the cost of direct materials used during June in the Work in Process account (at standard).

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Work in process inventory (1)	12,000
	Materials price variance	880
	Material quantity variance	1,200
	Direct materials inventory (2)		14,000
	(To record cost of direct materials used in June.)

(Table 1)

• 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 $12,000.
• Materials price variance is an asset and there is an increase in the value of an asset. Hence, debit the materials price variance by $880.
• Materials quantity variance is an asset and there is an increase in the value of an asset. Hence, debit the materials quantity variance by $1,200.
• Direct materials inventory is an asset and there is a decrease in the value of an asset. Hence, credit the direct materials inventory by $14,000.

Working Notes:

Calculate the work in process inventory for direct materials:

$\begin{array}{c}\begin{array}{l}\text{Work in process inventory }\\ \text{for direct materials }\end{array}\}\text{=Units actually produced }\times \left(\begin{array}{l}\text{Standard ounces used}\\ \text{ for direct materials }\\ \times \text{ Standard per ounce used}\\ \text{for direct materials}\end{array}\right)\\ =8,000\times \left(10/\text{oz}\times \text{\$0}\text{.15/oz}\right)\\ =\$12,000\end{array}$

(1)

Calculate the direct materials inventory:

$\begin{array}{c}\text{Direct materials inventory=Units actually produced }\times \left(\begin{array}{l}\text{Actual ounces used}\\ \text{ to produce direct materials }\\ \times \text{ Actual per ounce used}\\ \text{ to produce direct materials}\end{array}\right)\\ =8,000\times \left(11/\text{oz}\times \text{\$0}\text{.16/oz}\right)\\ =\$14,080\end{array}$

(2)

b.

To determine

Compute the labor rate variance and the labor efficiency variance and also prepare journal entry to record the cost of direct labor used during June in the Work in Process account (at standard).

Explanation of Solution

Compute the labor rate variance and the labor efficiency variance:

$\begin{array}{c}\text{Labor rate variance = Actual hours ×}\left(\text{Standard hourly rate - Actual hourly rate}\right)\\ \text{=}\left(\begin{array}{l}8,000\text{units }\times 0.45\text{ actual hours }\\ \text{ used for direct labor }\end{array}\right)\times \left(\text{\$10}\text{.00/hour}-\text{\$10}\text{.40/hour}\right)\\ =3,600\times \text{\$0}\text{.4/ hour}\\ \text{=}-\text{\$1,440 (Unfavorable)}\end{array}$

$\begin{array}{c}\text{Labor efficiency variance = Standard hourly rate ×}\left(\text{Standard hours - Actual hours}\right)\\ \text{= \$10}\text{.00/hour×}\left(\left[\text{8,000 units }\times 0.5\text{hours}\right]-\left[\text{8,000 units }\times 0.45\text{hours}\right]\right)\\ =\text{\$10}\text{.00/hour}\times -400\text{}\text{ hours}\\ \text{=\$4,000 (Favorable)}\end{array}$

Therefore, the labor rate and efficiency variances of Incorporation P is ($1,440) and $4,000.

Prepare journal entry to record the cost of direct labor used during June in the Work in Process account (at standard).

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Work in process inventory (3)	40,000
	Labor rate variance	1,440
	Labor efficiency variance		4,000
	Direct Labor (4)		37,440
	(To record the cost of direct labor charged to production in June.)

(Table 2)

• 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 $40,000.
• Labor rate variance is an asset and there is an increase in the value of an asset. Hence, debit the labor rate variance by $1,440.
• Labor efficiency variance is an asset and there is a decrease in the value of an asset. Hence, credit the labor efficiency variance by $4,000.
• Direct labor is an asset and there is a decrease in the value of an asset. Hence, credit the direct labor by $37,440.

Working notes:

Calculate the work in process inventory for direct labor cost:

$\begin{array}{c}\begin{array}{l}\text{Work in process inventory }\\ \text{for direct labor }\end{array}\}\text{=Units actually produced ×}\left(\begin{array}{l}\text{Standard hours used}\\ \text{ for direct materials }\\ \text{× Standard rate per hours used}\\ \text{ for direct labor}\end{array}\right)\\ \text{=8,000×}\left(\text{0}\text{.5 hours×\$10/ hr}\right)\\ \text{=\$40,000}\end{array}$

(3)

Calculate the direct labor inventory:

$\begin{array}{c}\text{Direct labor inventory=Units actually produced }\times \left(\begin{array}{l}\text{Actual hours used}\\ \text{for direct labor}\\ \times \text{ Actual per hours used}\\ \text{ for direct labor}\end{array}\right)\\ =8,000\times \left(0.45\text{ hours }\times \text{\$10}\text{.40/hr}\text{.}\right)\\ =\$37,440\end{array}$

(4)

c.

To determine

Compute the overhead spending variance and the overhead volume variance and also prepare journal entry to assign overhead cost to production in June.

Explanation of Solution

Compute the overhead spending variance and the overhead volume variance

Particulars	Amount in $
Overhead budgeted for 8,000 units:
Fixed	5,000
Variable (8,000 units × $0.50 per unit)	4,000
Total overhead per  flexible budget	9,000
Less: Actual overhead in June ($5000+$4,600)	9,600
Overhead spending variance (unfavorable)	(600)

 (Table 3)

Particulars	Amount
Overhead applied at standard cost ($1 ×8,000 units)	$ 8,000
Less: Overhead per  flexible budget	$9,000
Volume variance (unfavorable)	$ (1,000)

(Table 4)

Therefore, the manufacturing overhead spending and volume variances of Incorporation P are ($600) and ($1,000).

Prepare journal entry to assign overhead cost to production in June.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Work in process inventory (5)	8,000
	Overhead  spending variance	600
	Overhead volume variance	1,000
	Manufacturing Overhead (6)		9,600
	(To apply overhead cost of to 8,000 units produced at  standard rate of $1 per unit)

(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 $8,000.
• 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 $600.
• Overhead volume variance (Expense) is a component of stockholder’s equity and there is an increase in the value of expense. Hence, debit the volume variance by $1,000.
• 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 $9,600.

Working notes:

Calculate the work in process inventory for overhead:

$\begin{array}{c}\begin{array}{l}\text{Work in process inventory }\\ \text{for manufacturing overhead}\end{array}\}\text{=Units actually produced ×}\left(\begin{array}{l}\text{Standard rate per hours used }\\ \text{for manufacturing overhead }\end{array}\right)\\ \text{=8,000× \$1 per unit}\\ \text{=\$8,000}\end{array}$

(5)

Calculate the direct labor inventory:

$\begin{array}{c}\text{Manufacturing overhead inventory=}\left(\begin{array}{l}\text{Actual fixed cost of manufacturing overhead+}\\ \text{Actual variable cost of manufacturing overhead}\end{array}\right)\\ =\$5,000+\$4,600\\ =\$9,600\end{array}$

(6)