Chapter 9, Problem 30P

Algers Company produces dry fertilizer. At the beginning of the year, Algers had the following standard cost sheet:

Algers computes its overhead rates using practical volume, which is 54,000 units. The actual results for the year are as follows:

1. a. Units produced: 53,000
2. b. Direct materials purchased: 274,000 pounds at $2.50 per pound
3. c. Direct materials used: 270,300 pounds
4. d. Direct labor: 40,100 hours at $17.95 per hour
5. e. Fixed overhead: $161,700
6. f. Variable overhead: $122,000

Required:

1. 1. Compute price and usage variances for direct materials.
2. 2. Compute the direct labor rate and labor efficiency variances.
3. 3. Compute the fixed overhead spending and volume variances. Interpret the volume variance.
4. 4. Compute the variable overhead spending and efficiency variances.
5. 5. Prepare journal entries for the following:
   1. a. The purchase of direct materials
   2. b. The issuance of direct materials to production (Work in Process)
   3. c. The addition of direct labor to Work in Process
   4. d. The addition of overhead to Work in Process
   5. e. The incurrence of actual overhead costs
   6. f. Closing out of variances to Cost of Goods Sold

To determine

Compute the direct materials price variance and the direct materials usage variance.

Explanation of Solution

Direct material price variance: The variation in between actual price and estimated price paid for materials multiplied by the actual quantity is called material price variance. It is used to determine difference in price paid for material the price that was supposed to be paid for material.

The following formula is used to calculate direct material price variance:

$\text{Direct materials price variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Price}-\\ \text{Standard Price}\end{array}\right)\\ \times \text{Actual Quantity}\end{array}\right]$

Direct material usage (efficiency) variance: It is a measure that determines the variation in between actual and standard quantity of input multiplied by the standard unit price is called material usage variance.

The following formula is used to calculate direct material usage variance:

$\text{Direct materials usage variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Quantity}-\\ \text{Standard Quantity}\end{array}\right)\\ \times \text{Standard Price}\end{array}\right]$

Compute the direct materials price variance:

$\begin{array}{c}\text{Direct materials price variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Price}-\\ \text{Standard Price}\end{array}\right)\\ \times \text{Actual Quantity}\end{array}\right]\\ =\left[\begin{array}{l}\left(\begin{array}{l}\text{\$2}\text{.50 per pound}\\ -\text{\$2}\text{.60 per pound}\end{array}\right)\\ \times \text{274,000 pounds}\end{array}\right]\\ =\left[\text{\$}\text{.10}\times \text{274,000}\right]\\ =\$27,400F\end{array}$

Compute the direct materials usage variance:

$\begin{array}{c}\text{Direct materials usage variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Quantity}-\\ \text{Standard Quantity}\end{array}\right)\\ \times \text{Standard Price}\end{array}\right]\\ =\left[\begin{array}{l}\left(\text{270,300 pounds}-\text{265,000}\right)\\ \times \$2.60\end{array}\right]\\ =\left[5,300\times \$2.60\right]\\ =\$13,780\text{ U}\end{array}$

Working note 1: Calculate the standard quantity:

$\begin{array}{c}\text{Standard quantity = }\left(\begin{array}{l}\text{Direct materials per lbs}\\ \times \text{Number of units produced}\end{array}\right)\\ =\left(5\times 53,000\text{ units}\right)\\ =265,000\end{array}$

Conclusion

Therefore, the direct materials price variance and the usage variance is $27,400 F and $613,780 U respectively.

To determine

Calculate the direct labor rate variance and labor efficiency variance.

Explanation of Solution

Direct Labor Rate Variance: The direct labor rate variance is a measure to determine the variation in the estimated cost of the direct labor and the actual cost of the direct labor and is multiplied by the actual hours is called direct labor rate variance.

The following formula is used to calculate the direct labor rate variance:

$\text{Direct labor rate variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Rate}-\\ \text{Standard Rate}\end{array}\right)\\ \times \text{Actual Hours}\end{array}\right]$

Direct labor efficiency variance is a measure that determines the difference between the estimated labor hours and the actual labor hours used and is multiplied by the standard rate per hour is called material usage variance.

The following formula is used to calculate direct labor efficiency variance:

$\text{Direct labor efficiency variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Hours}-\\ \text{Standard Hours}\end{array}\right)\\ \times \text{Standard Rate Per Hour}\end{array}\right]$

Calculate the direct labor rate variance:

$\begin{array}{c}\text{Direct labor rate variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Rate}-\\ \text{Standard Rate}\end{array}\right)\\ \times \text{Actual Hours}\end{array}\right]\\ =\left[\begin{array}{l}\left(\text{\$17}\text{.95}-\$18.00\right)\\ \times 40,100\text{Hours}\end{array}\right]\\ =\left[\$.05\times 40,100\text{Hours}\right]\\ =\$2,005\text{ F}\end{array}$

Calculate the labor efficiency variance:

$\begin{array}{c}\text{Direct labor efficiency variance}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Actual}\text{Hours}-\\ \text{Standard Hours}\end{array}\right)\\ \times \text{Standard Rate Per Hour}\end{array}\right]\\ =\left[\begin{array}{l}\left(\text{40,100 hours}-39,750\text{ hours}\right)\\ \times \$18.00\text{ Per Hour}\end{array}\right]\\ =\left[350\times \$18.00\text{ Per Hour}\right]\\ =\$6,300\text{ U}\end{array}$

Working note 2: Calculate the standard hours:

$\begin{array}{c}\text{Standard hours = }\left(\begin{array}{l}\text{Direct labor per hour}\\ \times \text{Number of units produced}\end{array}\right)\\ =\left(.75\times 53,000\text{ units}\right)\\ =39,750\end{array}$

Conclusion

Therefore, the direct labor rat variance and the efficiency variance are $2,005 F and $6,300 U respectively.

To determine

Calculate the fixed overhead spending and volume variance.

Explanation of Solution

Fixed overhead spending variance: It is the difference between actual fixed overhead and the budgeted fixed overhead.

Favorable variance occurs only when the fixed overhead is less than the budgeted overhead. Unfavorable variance occurs only when the fixed overhead is more than the budgeted overhead.

The following formula is used to calculate fixed overhead spending variance:

 $\text{Fixed overhead spending variance = }\left(\begin{array}{l}\text{Actual fixed overhead}\\ -\text{Budgeted fixed overhead}\end{array}\right)$

Fixed overhead volume variance: It is the difference between budgeted fixed overhead and the applied fixed overhead.

The following formula is used to calculate fixed overhead volume variance:

$\text{Volume variance = }\left(\begin{array}{l}\text{Budgeted fixed overhead}\\ -\text{Applied fixed overhead}\end{array}\right)$

Calculate the fixed overhead spending volume variance:

Fixed overhead spending:

Step 1: Compute the budgeted fixed overhead.

$\begin{array}{c}\text{Budgeted fixed overhead =}\left[\begin{array}{l}\text{ Standard fixed overhead rate}\times \\ \text{ Actual hours}\end{array}\right]\\ \text{=}\left[\text{\$4}\times 40,500\right]\\ =\$162,000\end{array}$

Step 2: Calculate the fixed overhead spending variance.

$\begin{array}{c}\text{Fixed overhead spending variance = }\left(\begin{array}{l}\text{Actual fixed overhead}\\ -\text{Budgeted fixed overhead}\end{array}\right)\\ \text{ = }\left(\text{\$161,700}-\$162,000\right)\\ =\$300\text{ F}\end{array}$

Working note 3: Calculate the standard fixed overhead rate:

$\begin{array}{c}\text{Standard fixed overhead rate =}\left(\frac{\text{ Standard fixed overhead}}{\text{Direct labor hours}}\right)\\ \text{=}\left(\frac{\text{ \$161,700}}{\text{40,100}}\right)\\ =\$4.00\end{array}$

Working note 4: Calculate the direct labor hour per unit:

$\begin{array}{c}\text{Direct labor hour per unit =}\left(\frac{\text{ Actual direct labor hours}}{\text{Units prodcued}}\right)\\ \text{=}\left(\frac{\text{ 40,100 hours}}{\text{53,000 units}}\right)\\ =0.75\text{ hours per unit }\end{array}$

Working note 5: Calculate the actual hours:

$\begin{array}{c}\text{Actual hour =}\left(\begin{array}{l}\text{Number of units produced}\\ \times \text{Direct labor hour per unit}\end{array}\right)\\ =\left(\text{54,000}\times 0.75\text{hours per unit}\right)\\ =40,500\text{ hours}\end{array}$

Volume variance:

Step 1: Compute the applied fixed overhead.

$\begin{array}{c}\text{Applied fixed overhead =}\left[\begin{array}{l}\text{ Standard fixed overhead rate}\times \\ \text{ Standard hours}\end{array}\right]\\ \text{=}\left[\text{\$4}\times 39,750\text{ hours}\right]\\ =\$159,000\end{array}$

Step 2: Compute the volume variance.

$\begin{array}{c}\text{Volume variance = }\left(\begin{array}{l}\text{Budgeted fixed overhead}\\ -\text{Applied fixed overhead}\end{array}\right)\\ \text{= }\left(\$162,000-\$159\text{,000}\right)\\ =\$3,000\text{ U}\end{array}$

Working note 6: Calculate the standard fixed overhead rate:

$\begin{array}{c}\text{Standard fixed overhead rate =}\left(\frac{\text{ Standard fixed overhead}}{\text{Direct labor hours}}\right)\\ \text{=}\left(\frac{\text{ \$161,700}}{\text{40,100}}\right)\\ =\$4.00\end{array}$

Working note 7: Calculate the direct labor hour per unit:

$\begin{array}{c}\text{Direct labor hour per unit =}\left(\frac{\text{ Actual direct labor hours}}{\text{Units prodcued}}\right)\\ \text{=}\left(\frac{\text{ 40,100 hours}}{\text{53,000 units}}\right)\\ =0.75\text{ hours per unit }\end{array}$

Working note 8: Calculate the standard hours:

$\begin{array}{c}\text{Standard hour =}\left(\begin{array}{l}\text{Units produced}\\ \times \text{Direct labor hour per unit}\end{array}\right)\\ =\left(\text{53,000}\times 0.75\text{hours per unit}\right)\\ =39,750\text{ hours}\end{array}$

Conclusion

Therefore, the fixed overhead spending and volume variance are $300 F and $3,000 U respectively.

To determine

Calculate the variable overhead spending and efficiency variances.

Explanation of Solution

Overhead Variance: The overhead variance is the difference arising between the real overhead consumed in the production of a product, and the estimated overhead determined in the production of that product.

Spending variances: It arises when management pays an amount which is different from the standard price for purchasing an item. The variable overhead spending variance measures the total effect of differences in the actual variable overhead rate (AVOR) and the standard variable overhead rate (SVOR).

Efficiency variances: It arises when standard direct labor hours expected for actual production different from labor the actual direct labor hours used.

Variable overhead efficiency variance tells managers how much of the total variable manufacturing overhead variance is due to using more or fewer machine hours than anticipated for the actual volume of output.

Compute the variable overhead spending variance:

Step 1: Compute the budgeted variable overhead cost.

$\begin{array}{c}\text{Budgeted variable overhead cost =}\left[\begin{array}{l}\text{ Standard variable overhead rate}\\ \times \text{Actual direct labor hours}\end{array}\right]\\ \text{ =}\left[\text{\$3}\text{.00}\times 40,100\right]\\ =\$120,300\end{array}$

Step 2: Compute the variable overhead spending variance.

$\begin{array}{c}\text{Variable overhead spending variance = }\left[\begin{array}{c}\text{Actual variable overhead costs}-\\ \text{Budgeted variable overhead costs}\end{array}\right]\\ \text{= }\left[\text{\$122,000}-\$\text{120,300}\right]\\ =\$1,700\text{U}\end{array}$

Compute the variable overhead efficiency variance:

Step 1: Compute the applied variable overhead.

$\begin{array}{c}\text{Applied variable overhead =}\left[\begin{array}{l}\text{ Standard variable overhead rate}\\ \times \text{Standard hours}\end{array}\right]\\ \text{=}\left[\text{\$3}\text{.00}\times 39,750\right]\\ =\$119,250\end{array}$

Step 2: Compute the variable overhead efficiency variance.

$\begin{array}{c}\text{Efficiency variance = }\left(\begin{array}{l}\text{Budgeted variable overhead}\\ -\text{Applied variable overhead}\end{array}\right)\\ \text{= }\left(\$120,300-\$\text{119,250}\right)\\ =\$1,050\text{ U}\end{array}$

Working note 9: Calculate the direct labor hour per unit:

$\begin{array}{c}\text{Direct labor hour per unit =}\left(\frac{\text{ Actual direct labor hours}}{\text{Units prodcued}}\right)\\ \text{=}\left(\frac{\text{ 40,100 hours}}{\text{53,000 units}}\right)\\ =0.75\text{ hours per unit }\end{array}$

Working note 10: Calculate the standard hours:

$\begin{array}{c}\text{Standard hour =}\left(\begin{array}{l}\text{Units produced}\\ \times \text{Direct labor hour per unit}\end{array}\right)\\ =\left(\text{53,000}\times 0.75\text{hours per unit}\right)\\ =39,750\text{ hours}\end{array}$

Conclusion

Therefore, the variable overhead spending and efficiency variance are $1,700 U and $1,050 U respectively.

To determine

Prepare journal entries for the given.

Explanation of Solution

Journalizing: It is the process of recording the transactions of an organization in a chronological order. Based on these journal entries recorded, the amounts are posted to the relevant ledger accounts.

Accounting rules for journal entries:

• To increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains.
• To decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains.

Prepare journal entries for direct materials and direct labor:

Date	Accounts title and explanation	Debit ($)	Credit ($)
a.	Direct Materials	712,400
	Direct Materials Price variance		27,400
	Accounts Payable		685,000
	(To record the purchase of direct materials)
b.	Work in Process	689,000
	Direct Materials Usage Variance	13,780
	Direct Materials		702,780
	(To record the usage of direct materials)
c.	Work in Process	715,500
	Direct Labor Efficiency Variance	6,300
	Direct Labor Rate Variance		2,005
	Wages Payable		719,795
	(To record the use of direct labor)
d.	Work in Process	278,250
	Variable Overhead Control		119,250
	Fixed Overhead Control		159,000
	(To record assign overhead to the production)
e.	Variable Overhead Control	122,000
	Fixed Overhead Control	161,700
	Miscellaneous Accounts		283,700
	(To record incurrence of actual overhead)
Closing direct materials and direct labor variances:
f.	Direct Materials Price variance	27,400
	Direct Labor Rate Variance	2,005
	Direct Materials Usage Variance		13,780
	Direct Labor Efficiency Variance		6,300
	Cost of Goods Sold		9,325
	(To close the direct materials and direct labor variances)
Closing overhead variances:
	Fixed Overhead Volume Variance	3,000
	Variable Overhead Spending Variance	1,700
	Variable Overhead Efficiency Variance	1,050
	Fixed Overhead Spending Variance		300
	Fixed Overhead Control		2,700
	Variable Overhead Control		2,750
	(To close the overhead variances)
	Cost of Goods Sold	5,750
	Fixed Overhead Volume Variance		3,000
	Variable Overhead Spending Variance		1,700
	Variable Overhead Efficiency Variance		1,050
	(To close the overhead variances)
	Fixed Overhead Spending Variance	300
	Cost of Goods Sold		300
	(To close the cost of goods sold)

Table (1)