Rhudy Corporation uses a standard cost system in which inventories are recorded

Question

Rhudy Corporation uses a standard cost system in which inventories are recorded at their standard costs and any variances are closed directly to Cost of Goods Sold. The direct labor standards for the company's only product specify 0.60 hours per unit at $20.00 per hour. During the year, the company started and completed 20,700 units. Direct labor employees worked 12120 hours at an average cost of $18.90 per hour. Assume that all transactions are recorded on a worksheet as shown in the text. On the left-hand side of the equals sign in the worksheet are columns for Cash, Raw Materials, Work in Process, Finished Goods, and PP&E; (net). All of the variance columns are on the right-hand-side of the equals sign along with the column for Retained Earnings. Skipped Print When recording the direct labor costs, the Work in Process inventory account will increase (decrease) by:

Explanation / Answer

Calculation of Actual Hours worked

Total units produced= 20700 units

Time required to prepare 1 unit =0.60 hours

Total time required to prepare 20700 units = 20700 * 0.60

= 12420 hours

Calculation of Variances

Labour Rate Variance = (Actual Hours worked x Actual Rate) - (Actual hours worked x Standard Rate)

= (12420 * 20) - (12420 * 18.90)

= 13662 (Unfavourable)

Labour Rate Effieciency = (Actual hours worked * Standard rate) - ( Standard Hours worked * Standard Rate )

= (12420 * 18.90 ) - (12120 * 18.90)

= 5670 (Unfavourable)

Journal Entry for recording Labour Costs

Work in Process( 12120 * 18.90 ) dr 229068

Labour Rate Variance dr 13662

Labour Efficiency Variance dr 5670

To Wages Payable ( 12420 * 20 ) 248400

Hence the Work in process will increase by $229068

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