Algers Company produces dry fertilizer. At the beginning of the year, Algers had
ID: 2376811 • Letter: A
Question
Algers Company produces dry fertilizer. At the beginning of the year, Algers had the following standard cost sheet:
Direct materials (5lbs. @ $2.60) $13.00
Direct Labor (0.75 hr @ $18.00) 13.50
Fixed overhead (0.75 hr @ $4.00) 3.00
Variable overhead (0.75 hr @ $3.00) 2.25
Standard cost per unit $31.75
Algers computers is overhead rates using practical volume, which is 54,000 units. The actual results for the year are as follows:
a. Units produced: 53,000
b. Direct materials purchased: 274,000 pounds at $2.50 per pound
c. Direct materials used: 270,300 pounds
d. Direct labor: 40,100 hours at $17.95 per hour
e. Fixed overhead: $161,700
f. Variable overhead: $122,000
Required:
1. Compute price and usage variances for direct materials.
2. Compute the direct labor rate and labor efficiency variances.
3. Compute the fixed overhead spending and volume variances. Intercept the volume variance.
4. Compute the variable overhead spending and efficiency varainces.
5. Prepare journal entries for the following:
a. The purchase of direct materials
b. The issurance of direct materials to production (Work in Process)
c. The addition of direct labor to Work in Process
d. The addition of overhead to Work in Process
e. The incurrence of actual overhead costs
f. Closing out of variances to Cost of Goods Sold
Explanation / Answer
Caculating direct labor variance and direct labor efficency variance?
I
Sonne Company produces a perfume called Whim. The direct materials and direct labor standards for one bottle of Whim are given below:
Standard Quantity or Hours Standard Price
or Rate Standard
Cost
Direct materials 7.2 ounces $ 2.50 per ounce $ 18.00
Direct labor 0.4 hours $ 10.00 per hour $ 4.00
During the most recent month, the following activity was recorded:
a. Twenty thousand ounces of material were purchased at a cost of $2.40 per ounce.
b. All of the material was used to produce 2,500 bottles of Whim.
c. Nine hundred hours of direct labor time were recorded at a total labor cost of $10,800.
Required:
1.
Compute the direct materials price and quantity variances for the month. (Input all amounts as positive values. Do not round your per unit rates. Leave no cells blank - be certain to enter "0" wherever required. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Omit the "$" sign in your response.)
Direct materials price variance $
Direct materials quantity variances $
2.
Compute the direct labor rate and efficiency variances for the month. (Input all amounts as positive values. Do not round your per unit rates. Leave no cells blank - be certain to enter "0" wherever required. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Omit the "$" sign in your response.)
Direct labor rate variance $
Direct labor efficiency variances $
DM Price variance = Stnd price vs actual price x actual quantity purchased (2,000 Fav)
DM Quantity variance = Stnd qty vs actual qty x stnd price (5,000 Unfav)
DL Rate variance = Standard rate vs actual rate x actual hours (1,800 Unfav)
DL Efficiency variance = Standard hrs vs actual hrs x standard rate (1,000 Fav)
Direct Materials Usage Variance
Under a standard costing system, production and inventories are reported at the standard cost%u2014including the standard quantity of direct materials that should have been used to make the products. If the manufacturer actually uses more direct materials than the standard quantity of materials for the products actually manufactured, the company will have an unfavorable direct materials usage variance. If the quantity of direct materials actually used is less than the standard quantity for the products produced, the company will have a favorable usage variance. The amount of a favorable and unfavorable variance is recorded in a general ledger account Direct Materials Usage Variance. (Alternative account titles include Direct Materials Quantity Variance or Direct Materials Efficiency Variance.) Let's demonstrate this variance with the following information.
January 2012
In order to calculate the direct materials usage or quantity variance, we start with the number of acceptable units of products that have been manufactured%u2014also known as the good output. At DenimWorks this is the number of good aprons physically produced. If DenimWorks produces 100 large aprons and 60 small aprons during January, the production and the finished goods inventory will begin with the cost of the direct materials that should have been used to make those aprons. Any difference will be a variance.
NOTE:
We are not determining the quantity of aprons that DenimWorks should have made. Rather, we are determining whether the 100 large aprons and 60 small aprons that were actually manufactured were produced efficiently. In the case of direct materials, we want to determine whether or not the company used the proper amount of denim to make the 160 aprons that were actually produced. (For the purposes of calculating the direct materials usage variance, it does not concern us whether DenimWorks had a goal to produce 100 aprons, 200, aprons, or 250 aprons.)
Standard costs are sometimes referred to as the "should be costs." DenimWorks should be using 278 yards of denim to make 100 large aprons and 60 small aprons as shown in the following table.
Large Aprons
Small Aprons
Total
Actual aprons manufactured
100
60
Standard yards of denim per apron manufactured
2.0 yd.
1.3 yd.
Total standard yards of denim for the actual good aprons manufactured%u2014the number of yards of denim that should have been used to make the good output
200
78 yd.
278 yd.
We determine the total standard cost of the denim that should have been used to make the 160 aprons by multiplying the standard quantity of denim (278 yards) by the standard cost of a yard of denim ($3 per yard):
Large Aprons
Small Aprons
Total
Total standard yards of denim for the actual good (aprons) manufactured
200 yd.
78 yd.
278 yd.
Standard cost per yard
$3
$3
$3
Standard cost of denim in the good output%u2014the aprons actually produced in January
$600
$234
$834
An inventory account (such as F.G. Inventory or Work in Process) is debited for $834; this is the standard cost of the direct materials component in the aprons manufactured in January 2012.
The Direct Materials Inventory account is reduced by the standard cost of the denim actually removed from the direct materials inventory. Let's assume that the actual quantity of denim removed from the direct materials inventory and used to make the aprons in January was 290 yards. Because Direct Materials Inventory reports the standard cost of the actual materials on hand, we reduce the account balance by $870 (290 yards used $3 standard cost per yard). After removing 290 yards of materials, the balance in the Direct Materials Inventory account is $2,130 (710 yards x $3 standard cost per yard).
The Direct Materials Usage Variance is: [the standard quantity of material that should have been used to make the good output minus the actual quantity of material used] X the standard cost per yard.
In our example, DenimWorks should have used 278 yards of material to make 100 large aprons and 60 small aprons. Because the company actually used 290 yards of denim, we say that DenimWorks did not operate efficiently%u2014an extra 12 yards of denim was used (278 vs. 290 = 12). When we multiply the 12 yards by the standard cost of $3 per yard, the result is an unfavorable direct materials usage variance of $36.
Let's put the above information into a format commonly used for computing variances:
Direct Materials Usage/Quantity/Efficiency Variance Analysis
2. Credit Direct Materials Inventory for the actual yards of denim used x the standard cost per yard of denim
3. Direct Material Usage Variance (Std Yd - Act Yd) x Std Cost
1. Debit Inventory-FG for the standard yards of denim that should have been used to make the good output x the standard cost per yard of denim
Act Yd x Std Cost
Difference
Std Yd x Std Cost
290 act yd x $3
(12 yd) x $3
278 std yd x $3
$870
$834
$36 Unfavorable
The journal entry for the direct materials portion of the January production is:
Date Account Name Debit Credit
Jan. 31, 2012 Inventory-FG 834
Direct Materials Usage Variance 36
Direct Materials Inventory 870
February 2012
Let's assume that in February 2012 DenimWorks produces 200 large aprons and 100 small aprons and that 520 yards of denim are actually used. From this information we can compute the following:
Large Aprons
Small Aprons
Total
Actual aprons manufactured
200
100
300
Standard yards of denim per apron manufactured
2.0 yd.
1.3 yd.
Total standard yards of denim for the actual aprons manufactured
400 yd.
130 yd.
530 yd.
Standard cost per yard
$3
$3
$3
Standard cost of denim in the good output
$1,200
$390
$1,590
Let's put the above information into our format:
Direct Materials Usage (or Quantity) Variance Analysis
2. Credit Direct Materials Inventory for the actual yards of denim used x the standard cost per yard of denim
3. Direct Material Usage Variance (Std Yd - Act Yd) x Std Cost
1. Debit Inventory-FG for the standard yards of denim that should have been used to make the good output x the standard cost per yard of denim
Act Yd x Std Cost
Difference
Std Yd x Std Cost
520 act yd x $3
10 yd x $3
530 std yd x $3
$1,560
$1,590
$30 Favorable
The journal entry for the direct materials portion of the February production is:
Date Account Name Debit Credit
Feb. 28, 2012 Inventory-FG 1,590
Direct Materials Usage Variance 30
Direct Materials Inventory 1,560
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