Problem 13 - Accounting

Question

At the beginning of October, Cornerstone Printers Company budgeted 16,000 books to be printed in October at standard direct materials and direct labor costs as follows: \begin{tabular}{lr} Direct materials & \(\$ 24,000\) \\ Direct labor & 8,000 \\ Total & \(\$ 32,000\) \\ \hline \end{tabular} The standard materials price is \(\$ 0.60\) per pound. The standard direct labor rate is \(\$ 10\) per hour. At the end of October, the actual direct materials and direct labor costs were as follows: \begin{tabular}{lr} Actual direct materials & \(\$ 21,600\) \\ Actual direct labor & 7,200 \\ Total & \(\$ 28,800\) \\ \hline \end{tabular} There were no direct materials price or direct labor rate variances for October. In addition, assume no changes in the direct materials inventory balances in October. Cornerstone Printers Company actually produced 14,000 units during October. Determine the direct materials quantity and direct labor time variances.

Step-by-Step Solution

Answer

Direct materials quantity variance: $600 unfavorable. Direct labor time variance: $200 unfavorable.

Step 1: Calculate Standard Quantity for Direct Materials

The budgeted amount was 16,000 books and the total standard direct materials cost was \(24,000. We divide this cost by the standard price per pound (\)0.60) to find the total pounds expected for 16,000 books: \(\frac{24,000}{0.60} = 40,000\) pounds. For the 14,000 books actually produced, the standard quantity is \(\frac{40,000}{16,000} \times 14,000 = 35,000\) pounds.

Step 2: Determine Actual Quantity for Direct Materials Used

No actual pounds of direct materials used is given, but we can use the actual cost and the standard price per pound to find it: \(\frac{21,600}{0.60} = 36,000\) pounds. This is the actual quantity of direct materials used in October.

Step 3: Calculate Direct Materials Quantity Variance

The variance is the difference between the actual quantity used and the standard quantity for the actual output, multiplied by the standard price per pound: \((36,000 - 35,000) \times 0.60 = 600\) dollars. This is a negative value, meaning unfavorable because more material than expected was used.

Step 4: Calculate Standard Hours for Direct Labor

The budgeted direct labor was \(8,000 for 16,000 books, meaning \(\frac{8,000}{10} = 800\) hours for 16,000 books (as the rate is \)10 per hour). For 14,000 books produced, standard hours are \(\frac{800}{16,000} \times 14,000 = 700\) hours.

Step 5: Determine Actual Hours for Direct Labor Used

No direct labor hours are given. Use actual cost and the standard rate to find it: \(\frac{7,200}{10} = 720\) hours. This is the actual direct labor time used.

Step 6: Calculate Direct Labor Time Variance

The variance is the difference between actual hours used and the standard hours for the actual output, multiplied by the standard rate per hour: \((720 - 700) \times 10 = 200\) dollars. This is also unfavorable since more hours than expected were used.

Key Concepts

Direct Materials Variance

Direct materials variance is a useful tool in cost accounting that helps to understand how well a company controls its material costs. In our example, Cornerstone Printers Company aimed to print 16,000 books with expected direct material costs of $24,000. By calculating variances, companies can identify discrepancies between what was expected and what actually occurred in terms of costs.

To determine the direct materials quantity variance, we first need to calculate how much material was supposed to be used (the standard quantity) for the number of units actually produced, which in this case was 14,000 books. The outlined computation shows that the standard quantity for actual production was 35,000 pounds.

Next, we calculate the actual material used. Using the actual costs and standard price per pound, we find out that 36,000 pounds of material were used. This results in a variance of 1,000 pounds more than expected. Since more material was used than planned, it is labeled as an unfavorable variance, costing an extra $600.

Direct Labor Variance

Direct labor variance helps assess the effectiveness of workforce planning and efficiency in a manufacturing process. For Cornerstone Printers, the company planned to spend $8,000 for the labor necessary to produce 16,000 books, indicating a standard labor cost of $10 per hour.

The variance analysis begins by establishing how many hours should have been worked (standard hours) for the production of 14,000 units. In this scenario, standard hours required are 700 hours. The next step is to compute the actual hours worked, which the actual labor cost reveals to be 720 hours.

The difference of 20 extra hours worked compared to the standard leads to a direct labor time variance of $200, which is unfavorable. This indicates that the production took longer than expected, rising labor costs beyond what was planned.

Budgeting in Accounting

Budgeting is a fundamental exercise in accounting, crucial for both planning and control purposes in any business. At Cornerstone Printers, the budget creation aimed to predict the costs of printing 16,000 books through a detailed estimation of materials and labor.

An accurate budget allows a company to set financial boundaries, maintain control over its finances, and measure its performance. It involves determining standards for costs, evaluating actual performance against these costs, and then making informed decisions based on this analysis.

Effective budgeting incorporates past data, expected future market conditions, and strategic goals of the organization. Variance analysis, such as those observed in direct materials and labor, offers insight into deviations from the planned budget and highlights areas requiring management's attention. These tools empower businesses like Cornerstone Printers to adjust operations and improve financial stability.