Problem 20 - Accounting

Question

The Assembly Department produced 1,600 units of product during June. Each unit required \(1.4\) standard direct labor hours. There were 2,200 actual hours used in the Assembly Department during June at an actual rate of \(\$ 12.00\) per hour. The standard direct labor rate is \(\$ 12.50\) per hour. Assuming direct labor for a month is paid on the fifth day of the following month, journalize the direct labor in the Assembly Department on June 30 .

Step-by-Step Solution

Answer

Journal Entry: Debit WIP for $28,000, Credit Wages Payable for $26,400, Credit Labor Rate Variance $1,100, and Debit Labor Efficiency Variance for $500.

Step 1: Calculate Standard Labor Hours

To find the standard labor hours, multiply the number of units produced by the standard hours required per unit. There were 1600 units produced, each needing 1.4 hours:\[ \text{Standard Hours} = 1600 \times 1.4 = 2240 \text{ hours} \]

Step 2: Calculate Direct Labor Rate Variance

Direct labor rate variance is calculated by comparing the actual labor rate to the standard labor rate, multiplied by the actual hours worked:\[ \text{Labor Rate Variance} = (\text{Actual Rate} - \text{Standard Rate}) \times \text{Actual Hours} \]Substitute the given values:\[ \text{Labor Rate Variance} = (12.00 - 12.50) \times 2200 = -0.50 \times 2200 = -1100 \]This variance is unfavorable because the actual rate is less than the standard rate.

Step 3: Calculate Direct Labor Efficiency Variance

Direct labor efficiency variance is calculated by comparing the actual hours to the standard hours for the actual production, multiplied by the standard labor rate:\[ \text{Labor Efficiency Variance} = (\text{Standard Hours} - \text{Actual Hours}) \times \text{Standard Rate} \]Substitute the given values:\[ \text{Labor Efficiency Variance} = (2240 - 2200) \times 12.50 = 40 \times 12.50 = 500 \]This variance is favorable because fewer actual hours were used compared to standard hours.

Step 4: Journalize Direct Labor Costs

To journalize the direct labor costs, record the actual labor cost, labor rate variance, and labor efficiency variance:- Debit Work in Process (WIP) for the standard labor cost:\[ \text{WIP (Direct Labor)} \quad 2240 \times 12.50 = 28,000 \]- Credit Direct Labor Rate Variance for the unfavorable variance:\[ \text{Labor Rate Variance - Unfavorable} \quad 1100 \]- Credit Direct Labor Efficiency Variance for the favorable variance:\[ \text{Labor Efficiency Variance - Favorable} \quad 500 \]- Credit Wages Payable for actual labor cost:\[ \text{Wages Payable} \quad 2200 \times 12.00 = 26,400 \]Complete journal entry:- Debit WIP: \( 28,000 \)- Credit Wages Payable: \( 26,400 \)- Credit Labor Rate Variance: \( 1100 \)- Debit Labor Efficiency Variance: \( 500 \)This accounts and offsets the variances in the direct labor costs.

Key Concepts

Standard Labor Hours

Standard labor hours are crucial in measuring the expected labor input needed to produce a certain number of units. It provides a basis for evaluating labor efficiency and controlling labor costs. In our scenario, the Assembly Department produced 1,600 units, each requiring 1.4 standard direct labor hours.
To calculate the total standard labor hours, you would multiply the number of units produced by the standard hours per unit:
- Total standard labor hours = Number of units produced × Standard hours per unit - For this exercise: 1600 units × 1.4 hours = 2240 hours
These calculations are significant because they help companies set benchmarks for how much labor time should be allocated for production, allowing them to assess labor performance effectively.

Labor Rate Variance

Labor rate variance analyzes the difference between the actual labor rate paid and the standard labor rate set by the company. It shows how well a company is managing its labor costs in comparison to its budget.
The formula for labor rate variance is:
- \[\text{Labor Rate Variance} = (\text{Actual Rate} - \text{Standard Rate}) \times \text{Actual Hours}\]- In this case, Actual Rate = \(12.00, Standard Rate = \)12.50, Actual Hours = 2200- Calculation: \[-0.50 \times 2200 = -1100\]
The negative variance of \(1,100 is unfavorable because the actual rate paid (\)12.00) was less than the standard rate ($12.50), indicating savings didn't meet anticipated costs. It's essential for understanding cost management and efficiency in labor expenditures.

Labor Efficiency Variance

Labor efficiency variance looks at how effectively labor was used relative to expectations. It compares how many actual hours were worked to how many should have been worked (standard hours) for the production accomplished.
The formula for labor efficiency variance is:
- \[\text{Labor Efficiency Variance} = (\text{Standard Hours} - \text{Actual Hours}) \times \text{Standard Rate}\]- Standard Hours = 2240 hours, Actual Hours = 2200 hours, Standard Rate = \(12.50- Calculation: \[40 \times 12.50 = 500\]
This positive variance of \)500 is favorable, as fewer hours than expected were used, indicating efficient use of labor resources. Understanding this can help companies make better use of their workforce, improving productivity and reducing costs.

Journal Entry for Labor Costs

Recording labor costs correctly in the accounting books is essential for tracking variances and maintaining accurate financial statements. A journal entry for labor costs will include standard labor cost entries and adjustments for variances.
Here's how you could journalize the direct labor costs for June:

• Debit Work in Process (WIP) for the standard labor cost: \[ 2240 \times 12.50 = 28,000 \]
• Credit Labor Rate Variance for the unfavorable variance of:\[ \text{Labor Rate Variance} = 1100 \]
• Credit Wages Payable for actual labor cost:\[ 2200 \times 12.00 = 26,400 \]
• Credit Labor Efficiency Variance for the favorable variance of:\[ \text{Labor Efficiency Variance} = 500 \]

Complete journal entry:- Debit WIP: 28,000- Credit Wages Payable: 26,400- Credit Labor Rate Variance: 1100- Debit Labor Efficiency Variance: 500
This journal entry captures the total direct labor costs and adjusts for variances, ensuring accurate reflection in financial records. Recording these entries helps identify areas for improvement and enhances overall cost management.