Chapter 9, Problem 10E

Preparing Journal Entries to Record Direct Materials, Direct Labor, Variable Overhead Costs, and Variances
 
Refer to the information presented in E9-6 for Parker Plastic.

 Required:

Prepare the journal entry to record the following for Parker Plastic:

a. Direct materials costs and related variances. Assume the company purchases raw materials as needed and doesnot maintain any ending inventories.
b. Direct labor and related variances.
c. Variable overhead costs and related variances.
d. Fixed overhead transactions assuming overhead is applied based on budgeted production.

To determine

(a)

Concept introduction:

Price variance:

It is the difference between price per unit in standard and actual price of product and multiplying that with quantity purchased in actual.

Quantity variance:

It is referred to the amount which is computed by multiplying the standard price per unit with the difference between quantity in actual term and standard term of product.

Direct Material cost variance:

This amount is calculated as the difference between standard cost and actual cost of direct material. The result is favorable when price variance is more than quantity variance. The result is unfavorable when price variance is less than quantity variance.

To prepare:

The journal entry to record direct material transactions.

Answer to Problem 10E

The journal entries to record direct material costs and variances of parker plastic are given below.

Explanation of Solution

Standard quantity of plastic used $=12\text{sq}\text{. ft}\text{.}\times \text{1,000,000 units produced }=12,000,000$

Actual quantity of plastic used $=11,800,000\text{ sq}\text{. ft}\text{.}$

Standard price $=\$0.72\text{ per sq}\text{. ft}\text{.}$

$\begin{array}{c}\text{Actual price }=\frac{\$8,260,000}{11,800,000}\\ =\$0.7\text{ per sq}\text{. ft}\text{.}\end{array}$

Journal entries to record purchase of raw materialis as follows:

Date	Account name	Debit $	Credit $
	Raw materials inventory	$8,496,000$
	To Direct Materials price variance		$236,000$
	To Accounts payable		$8,260,000$

Note:

• Based on standard prices, Raw Material’s Inventory calculation are done.
• Based on actual prices, Account payable’s calculation are done.
• Direct material price variance is the reason of basic difference of the raw materials inventory and account payable.
• Direct material price variance is credited because it is favorable.

Journal entries to record the transfer of cost from raw material inventory to cost of goods soldis as follows:

Date	Account name	Debit $	Credit $
	Cost of goods sold	$8,640,000$
	To Direct Materials quantity variance		$144,000$
	To raw material		$8,496,000$

Note:

• Direct material price variance is credited because it is favorable.

To determine

(b)

Concept introduction:

Rate variance:

It is referred to the amount which is computed by multiplying the number of actual hours with the difference between actual rate and standard rate per hour of direct labour.

Time variance:

It is referred to the amount which is computed by multiplying the standard rate per hours with the difference between the number of actual hours and standard hours of direct labour.

Direct labour cost variance:

This amount is calculated as the difference between the actual cost and standard cost of direct labour for production. If answer is in negative than it is favourable. If answer is in positive than it is unfavorable.

To prepare:

The journal entry to record direct labour and related variances transactions.

Answer to Problem 10E

The journal entries to record direct labour and related variances of parker plastic are given below.

Explanation of Solution

Standard hours $=0.25\text{hr}\times 1,000,000\text{units produced}=\text{250,000hrs}$

Actual hours $=245,000\text{ hours}$

Standard rate $=\$12.20\text{ per hour}$

$\text{Actual rate =}\frac{\$2,891,000}{245,000\text{hrs}}=\$11.8\text{ per hr}$

Journal entries to record direct labour and related variances ofparker plastic are as follows:

Date	Account name	Debit $	Credit $
	Cost of goods sold $\left(2,50,000\times \$12.20\right)$	$3,050,000$
	To Direct labour rate variance $2,45,000\times \left(\$12.20-\$11.80\right)$		$98,000$
	To Direct labour efficiency variance $\$12.20\times \left(250,000-245,000\right)$		$61,000$
	To wages payable or cash $\left(245,000\times \$11.80\right)$		$2,891,000$

Note:

• Standard labour cost directly recorded as a cost of goods sold and it is debited in above entry.
• Actual labour cost is recorded as a wages payable or cash and it is credited.
• Actual labour hour used is less than standard labour hour so, direct labour efficiency variance is favorable because of that it is credited.
• Actual labour hourly rate is less than standard labour hourly rate so, direct labour rate variance is favorable because of that it is credited.

To determine

(c)

Concept introduction:

Volume variance:

It is referred to the amount which is computed by multiplying the fixed standard cost rate per hour with the difference between the actual hours and standard hours of variable factory overhead.

Variable factory overhead cost variance:

This amount is calculated as the difference between the contrallable variance and volume variance of variable factory overhead. If price is in negative than it is favourable. If price is in positive than it is unfavorable.

To prepare:

The journal entry to record variable overhead costs and related variances transactions.

Answer to Problem 10E

The journal entries to record variable overhead costs and related variances of parker plastic are given below.

Explanation of Solution

Standard hours $=0.25\text{hours}\times \text{1,000,000units produced }=250,000\text{hours}$

Standard rate $=1.20\text{per hour}$

Actual hours is $245,000\text{hours}$

$\begin{array}{c}\text{Actual rate=}\frac{\$318,500}{245,000\text{hours}}\\ =\$1.3\text{per hr}\end{array}$

Journal entries to record variable overhead costs and related variances ofparker plastic are as follows:

Date	Account name	Debit $	Credit $
	Cost of goods sold $\left(2,50,000\times \$1.20\right)$	$3,00,000$
	Variable overhead variance $2,45,000\times \left(\$1.20-\$1.30\right)$	$24,500$
	To Variable overhead efficiency variance $\$1.20\times \left(250,000-245,000\right)$		$6,000$
	To wages payable or cash $\left(245,000\times \$1.30\right)$		$318,500$

To determine

(d)

Concept introduction:

Fixed overhead:

It is that overhead cost which does not change with change in activities.

To prepare:

The journal entry to record fixed overhead transactions.

Answer to Problem 10E

The journal entries to record fixed overhead costs and related variances of parker plastic are given below.

Explanation of Solution

Fixed overhead rate $=\$0.42$

Actual volume $=1,000,000\text{units}$

Budgeted volume $=900,000\text{units}$

Budgeted fixed overheads $=\$378,000$

Actual fixed overheads $=\$355,000$

Date	Account name	Debit $	Credit $
	Cost of goods sold $\left(1,000,000\times \$0.42\right)$	$420,000$
	To fixed overhead spending variace $\left(\$378,000-\$355,000\right)$		$23,000$
	To Fixed overhead volume variance $\$0.42\left(1,000,000-900,000\right)$		$42,000$
	To Wages payable or cash		$355,000$