28 PGA - Horngren'S Financial And Managerial Accounting

Question

Computing and journalizing standard cost variances

Moss manufactures coffee mugs that it sells to other companies for customizing with their own logos. Moss prepares flexible budgets and uses a standard cost system to control manufacturing costs. The standard unit cost of a coffee mug is based on static budget volume of 59,800 coffee mugs per month:

Direct material (0.2 lbs. @\(0.25 per lb)		\)0.05
Direct Labor (3 minutes @ \(0.11 per minute)		0.33
Manufacturing Overhead:
Variable (3 minutes @ \)0.06 per minute)	\(0.18
Fixed (3 minutes @ \)0.13 per minute)	0.39	0.57
Total Cost per Coffee Mug		\(0.95

 

Actual cost and production information for July 2018 follows: 

a. There were no beginning or ending inventory balances. All expenditures were on account.

b. Actual production and sales were 62,500 coffee mugs. 

c. Actual direct materials usage was 11,000 lbs. at an actual cost of \)0.17 per lb. 

d. Actual direct labor usage was 197,000 minutes at a total cost of \(25,610. 

e. Actual overhead cost was \)10,835 variable and \(29,765 fixed. 

f. Selling and administrative costs were \)95,000.

Requirements 

1. Compute the cost and efficiency variances for direct materials and direct labor. 

2. Journalize the purchase and usage of direct materials and the assignment of direct labor, including the related variances. 

3. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances. 

4. Journalize the actual manufacturing overhead and the allocated manufacturing overhead. Journalize the movement of all production costs from Work­-in­-Process Inventory. Journalize the adjusting of the Manufacturing Overhead account. 

5. Moss intentionally hired more highly skilled workers during July. How did this decision affect the cost variances? Overall, was the decision wise?

Step-by-Step Solution

Answer

1. Material and labor variance:

Component	Cost variance	Efficiency variance
Direct Material	$880 (F)	$375(F)
Direct Labor	$3,940(U)	$1,235(U)

 

1. Journal entry:

Transaction 1	It include entry made for the purchase of raw material.
Transaction 2	It include entry made for allocating raw material to work-in-process.
Transaction 3	It include entry made for allocating direct labor to work-in-process

 

1. Overhead variance:

Variable overhead cost variance	$985(F)
Variable overhead efficiency variance	$570(U)
Fixed overhead cost variance	$6,443(F)
Fixed overhead volume variance	$1,053(U)

 

1. The manufacturing overheads are adjusted by $4,405.
2. Decision to hire high skilled laborers is not wise.

Definition of Variance Analysis

The variance analysis is the financial metric calculated for controlling the business organization. Under this analysis, the business entity identifies the difference between estimated activity and the level of activity achieved.

Variance analysis

Direct material variance analysis:

Cost variance:

$\begin{array}{c}\mathbf{D}\mathbf{i}\mathbf{r}\mathbf{e}\mathbf{c}\mathbf{t}\mathbf{ }\mathbf{m}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{a}\mathbf{l}\mathbf{ }\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{ }\mathbf{v}\mathbf{a}\mathbf{r}\mathbf{i}\mathbf{a}\mathbf{n}\mathbf{c}\mathbf{e}\mathbf{=}\left(Actual cost-Standard cost\right)\mathbf{\times }\mathbf{A}\mathbf{c}\mathbf{t}\mathbf{u}\mathbf{a}\mathbf{l}\mathbf{ }\mathbf{q}\mathbf{u}\mathbf{a}\mathbf{n}\mathbf{t}\mathbf{i}\mathbf{t}\mathbf{y}\\ \mathbf{=}\left(\$0.17-\$0.25\right)\mathbf{\times }\mathbf{11}\mathbf{,}\mathbf{000}\\ \mathbf{=}\mathbf{\$}\mathbf{0}\mathbf{.}\mathbf{08}\mathbf{\times }\mathbf{11}\mathbf{,}\mathbf{000}\\ \mathbf{=}\mathbf{\$}\mathbf{880}\mathbf{\left(}\mathbf{F}\mathbf{\right)}\end{array}$

Efficiency variance:

$\begin{array}{c}Direct material efficiency variance=\left(Actual quantity-Standard quantity\right)\times Standard cost\\ =\left(11,000-\left(0.2\times 62,500\right)\right)\times \$0.25\\ =\left(11,000-12,500\right)\times \$0.25\\ =\$375\left(F\right)\end{array}$

Direct labor variance analysis:

Cost variance:

$\begin{array}{c}Direct labor cost variance=\left(Actual rate-Standard rate\right)\times Actual hours\\ =\left(\frac{\$25,610}{197,000}-\$0.11\right)\times 197,000\\ =\left(\$0.13-\$0.11\right)\times 197,000\\ =\$3,940\left(U\right)\end{array}$

Efficiency variance:

$\begin{array}{c}Direct labor efficiency variance=\left(Actual hours-Standard hours\right)\times Standard rate\\ =\left(197,000-\left(62,500\times 3\right)\right)\times \$0.13\\ =\left(197,000-187,500\right)\times \$0.13\\ =\left(9,500\right)\times 0.13\\ =\$1,235\left(U\right)\end{array}$

Journal entry for material

Date	Accounts and Explanation	Debit $	Credit $
1 Transaction	Raw material inventory	$2,750
	Direct material cost variance		$880
	Account payable		$1,870
2 Transaction	Work-in-process inventory	$3,125
	Direct material efficiency variance		$375
	Raw material inventory		$2,750
3 Transaction	Work-in-process	$24,375
	Direct labor efficiency variance	$1,235
	Wages payable		$25,610

Overhead variance

Variable overhead cost variance:

$\begin{array}{c}Variable over head cost variance=Actual over head-\left(Standard cost\times Actual quantity\right)\\ =\$10,835-\left(\$0.06\times 197,000\right)\\ =\$10,835-\$11,820\\ =\$985\left(F\right)\end{array}$

Variable overhead efficiency variance:

$\begin{array}{c}\mathrm{Variable} \mathrm{overhead} \mathrm{efficiency} \mathrm{variance}=\left(\mathrm{Actual} \mathrm{quantity}-\mathrm{Standard} \mathrm{quantity}\right)\times \mathrm{Standard} \mathrm{cost}\\ =\left(197,000-\left(62,500\times 3\right)\right)\times 0.06\\ =\left(197,000-187,500\right)\times 0.06\\ =9,500\times 0.06\\ =\mathrm{\$}570\left(\mathrm{U}\right)\end{array}$

Fixed overhead cost variance:

Particular	Amount $
Actual fixed overhead	$29,765
Less: Budgeted fixed overhead	(23,322)
Fixed overhead cost variance (unfavorable)	$6,443

 

Fixed overhead volume variance:

Particular	Amount $
Budgeted fixed overhead	$23,322
Less: Allocated fixed overhead	(24,375)
Fixed overhead volume variance (favorable)	$1,053

Journal entries

Date	Accounts and Explanation	Debit $	Credit $
Overhead incurred	Manufacturing overhead	$40,600
	Various accounts		$40,600
Overhead allocated	Work-in-process inventory	$11,250
	Manufacturing overhead		$11,250
Movement of production cost	Finished goods inventory	$38,750
	Work-in-process inventory		$38,750
	Cost of goods sold	$38,750
	Finished goods inventory		$38,750
Adjusting of manufacturing overhead	Variable overhead efficiency variance
	Fixed overhead cost variance	6,443
	Fixed overhead volume variance		1,053
	Manufacturing overhead		4,405
	Variable overhead cost variance		985

Decision of hiring highly skilled workers

The decision to hire highly skilled labor is not wise because hiring skilled labor must make labor efficiency variance favorable, but the increase the labour cost that leads to high labour cost variance, which is already unfavorable, therefore it is not wise decision.