Chapter 8, Problem 1E

In all of the exercises involving variances, use “F” and “U” to designate favorable and unfavorable variances, respectively.

E8-1 through E8-5 use the following data:

The standard operating capacity of Tecate Manufacturing Co. is 1,000 units. A detailed study of the manufacturing data relating to the standard production cost of one product revealed the following:

1. 1. Two pounds of materials are needed to produce one unit.
2. 2. Standard unit cost of materials is $8 per pound.
3. 3. It takes one hour of labor to produce one unit.
4. 4. Standard labor rate is $10 per hour.
5. 5. Standard overhead (all variable) for this volume is $4,000.

Each case in E8-1 through E8-5 requires the following:

1. a. Set up a standard cost summary showing the standard unit cost.
2. b. Analyze the variances for materials and labor.
3. c. Make journal entries to record the transfer to Work in Process of:
4. 1. Materials costs
5. 2. Labor costs
6. 3. Overhead costs

(When making these entries, include the variances.)

1. d. Prepare the journal entry to record the transfer of costs to the finished goods account.

Standard unit cost; variance analysis; journal entries

1,000 units were started and finished.

Case 1: All prices and quantities for the cost elements are standard, except for materials cost, which is $8.50 per pound.

Case 2: All prices and quantities for the cost elements are standard, except that 1,900 lb of materials were used.

To determine

Provide a standard cost summary providing the standard unit cost.

Explanation of Solution

Provide a standard cost summary providing the standard unit cost.

Materials—2 lb @ $8	$16
Labor—1 hr @ $10	$10
Factory overhead $\left(\text{\$4,000}\text{÷}\text{1,000}\text{units}\right)$	$4
Standard unit cost	$30

Figure (1)

To determine

Examine the variances for materials and labor.

Explanation of Solution

Case 1:

Calculate material price variance:

$\begin{array}{c}\text{Material}\text{price}\text{variance}\text{=}\left[\left(\text{Actual}\text{Price}-\text{Standard}\text{Price}\right)\text{×}\text{Actual}\text{Quantity}\right]\\ \text{=}\left[\left(\text{\$8}\text{.50}-\text{\$8}\right)\text{×}\text{2,000}\right]\\ \text{=}\text{\$1,000U}\end{array}$

Working note:

Calculate Actual Quality:

$\begin{array}{c}\text{Actual}\text{Quantity}\text{=}\text{Number}\text{of}\text{units}\text{×}\text{Actual}\text{quantity}\text{of}\text{materials}\text{used}\\ \text{=}\text{1,000}\text{units}\text{×}\text{2}\text{pounds}\\ \text{=}\text{2,000}\end{array}$

Case 2:

Calculate materials quantity variance:

$\begin{array}{c}\text{Materials}\text{quantity}\text{variance}\text{=}\left[\left(\text{Actual}\text{Quantity-Standard}\text{Quantity}\right)\text{×}\text{Standard}\text{price}\right]\\ \text{=}\left[\text{1,900}\text{lb}-\left(\text{1,000lb}\text{×}\text{2}\text{pounds}\right)\right]\text{×}\text{\$8}\\ \text{=\$800}\text{F}\end{array}$

Note: There are no labor variances in these cases.

To determine

Prepare journal entries.

Explanation of Solution

Case 1:

Date	Account Title and Explanation	Debit ($)	Credit($)
	Work in Process $\text{(1,000}\text{×}\text{2lb}\text{×}\text{\$8)}$	$16,000
	Materials Price Variance $\left(\text{2,000}\text{×}\text{\$0}\text{.50}\right)$	$1,000
	Materials $\left(\text{2,000}\text{×}\text{\$8}\text{.50}\right)$		$17,000
	(to record the entry for direct materials cost when the materials are issued into production)

Table (1)

Date	Account Title and Explanation	Debit ($)	Credit($)
	Work in Process $\left(\text{1,000}\text{×}\text{1}\text{hr}\text{×}\text{\$10}\right)$	$10,000
	Payroll		$10,000
	(to record the entry for direct labor cost)

Table (2)

Date	Account Title and Explanation	Debit ($)	Credit($)
	Work in Process $\left(\text{1,000}\text{×}\text{1hr}\text{×}\text{\$10}\right)$	$4,000
	Applied Factory overhead		$4,000
	(to record the entry applying factory overhead to work in process)

Table (3)

Case 2:

Date	Account Title and Explanation	Debit ($)	Credit($)
	Work in Process	$16,000
	Materials Quantity Variance $\left(\text{100}\text{×}\text{\$8}\right)$		$800
	Materials		$17,000
	(to record the entry for direct materials cost when the materials are issued into production)

Table (4)

Date	Account Title and Explanation	Debit ($)	Credit($)
	Work in Process	$10,000
	Payroll		$10,000
	(to record the entry for direct labor cost)

Table (5)

Date	Account Title and Explanation	Debit ($)	Credit($)
	Work in Process	$4,000
	Applied Factory overhead		$4,000
	(to record the entry applying factory overhead to work in process)

Table (6)

To determine

Prepare the journal entry.

Explanation of Solution

Case 1 and case 2:

Date	Account Title and Explanation	Debit ($)	Credit($)
	Finished Goods $\left(\text{1,000}\text{×}\text{\$30}\right)$	$30,000
	Work in process		$30,000
	(to record the entry for finished goods at standard cost)

Table (7)